From your perspective, how has the industry changed since you launched CapitalSource?

There has been a tremendous convergence that’s occurred in the financial services industry since then. Most capital providers have broadened their scope and now offer services in a far greater number of areas than they traditionally have, which has led to increased interaction among the various entities involved. There is also noticeably greater liquidity in the markets.

In what areas have these groups started converging?

This convergence has occurred in many areas. Capital providers, namely commercial banks, investment banks, hedge funds, private equity funds and specialty finance businesses, have all changed their focus from providing a very narrow concentration of services to providing as many services as they are capable of. For example, lending, an area historically dominated by commercial banks, now has investment banks, hedge funds and specialty lenders playing as large a role.

What’s driving this interaction?

Three things: liquidity in the market; lowering of the return threshold; and the ability for nontraditional participants to fund themselves in capital markets.

Do you think these developments are a good thing for middle-market finance, and will these trends continue?

While these developments are a “positive” for middle-market finance, they may begin to tighten. After their recent “broadening” into other areas of financial services, the tendency of the various groups involved (commercial banks, investment banks, hedge funds, etc.) will be to refocus on the things they do best. What will probably speed this up is the fact that conflicts between the groups will become more of an issue, and these conflicts will become even more difficult to manage.

Why has there been increased liquidity in the markets?

Three factors stand out: First, global liquidity and liquidity among banks. Second, the addition of more participants to the market. And third, the ready availability of good information that has allowed markets to correct themselves and has thus led to smaller risk premiums.

What are some of the major trends in private equity right now?

In all, firms have become broader and deeper. While they have gotten together and purchased large companies, at the same time, private equity has been “pushed down” to smaller deals, where there is now the buying and selling of smaller businesses between firms. This will continue to spur the “wealth effect” in the U.S., and tighter and even more compressed returns can be expected despite “bumps” in credit.

How will this affect the real estate industry?

In terms of real estate, there are a few areas of concern, but there is little to be concerned about with the housing market. There is a need to be more cautious regarding the commercial market, as deals are being done significantly above replacement costs.

What can we expect to see in the financial services industry in the near future?