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THE ECONOMICS OF THE PRIVATE MARKET

Summary

Agents are a key part of the market for privately placed debt. They gather, process, and sell information that would be prohibitively expensive for many issuers themselves to collect. They help enforce norms of behavior for borrowers and lenders that make the private market function more efficiently.

Agenting appears to be associated with economies of scale and scope that confer a distinct advantage on the large commercial banks and investment banks that specialize in serving the corporate finance needs of middle-market and large companies. Economies of scope of agenting apparently occur with other corporate finance service activities, in that bank and investment bank relationship officers can provide a stream of clients to agents while selling other products. Economies of scale arise from fixed costs of maintaining a staff of agents and from the information sources in the private market, which are such that costs of collecting information fall as the volume of an agent's business rises.

That agenting appears to be a competitive business with low barriers to entry implies that the profits available to new or small agents are not large. Slow trends of falling information costs and increasing information flows will likely increase competition among agents even more and will improve the efficiency of the private placement market as a whole.

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