As published in the November edition of Private Debt Investor.
With so much uncertainty, CLO funds are ramping up and securitisation looks set to play a big role in refinancing. Here, Rolf Caspers, global head of capital markets at Sanne, says EU regulations are shifting the dial, with a big impact for ESG compliance.
One can’t comment on private debt without looking at the bigger picture. The US elections will definitely have a big potential impact on the US economy, the US-China trade war, EU-US relations and UK-US relations.
The other overarching issue is obviously covid-19 and how this impacts global economies and markets. The increased chances of a hard Brexit also add to the uncertainty of the future political and economic relationships.
As a result, we face uncertainty from many angles. Beyond the real impact on companies, at the very least, this will lead to hesitancy towards future investments. In a best-case scenario: the US elections are tied up in November, Brexit is dealt with by the end of the year, and by early 2021 we have a vaccine for the virus. But for now, we are operating against a backdrop of hesitation.
This creates opportunities for some, and while the first-time promoters in our client portfolio may be struggling to promote their product and reach out to potential investors due to reduced personal contact, the well-established asset managers are sitting on huge amounts of dry powder and finding ample opportunity to deploy money.
For the larger funds, I think we will see capital being deployed into Q4 when the dust settles. I do expect, and see signs already, that everyone will come back into investment mode. We are through the first shock phase of covid-19, and we know the virus is not going away anytime soon. People need to deploy funds and find investment opportunities despite uncertainties in the market. The natural response for debt funds is to deploy more money into secondary markets or direct lending.
There is a real need in the market and debt funds are perfectly placed to service that need. CLO funds have been ramping up slowly for the last few years. Some are in a bit of a tight situation because borrowers are having difficulty repaying or are taking a payment pause. The product remains powerful and fits the time. There may be a need to refinance some CLOs, with some uderperforming. But on the whole, like debt funds, I see CLOs as a key tool to service the market.
One slight complication around CLOs is that if you structure them onshore in the EU, you are likely to fall under the EU securitisation regulation, which means you have to keep skin in the game. This is becoming more and more difficult for the banks.
Fundamentally, the investor base is there and there is huge available capital in the market. The pension schemes, insurers and reinsurance companies have significant need for returns, and have in the past had quite a bit invested into real estate-linked transactions – their comfort zone. More of those investors are now going into lending strategies, whether through CLOs or debt funds. The real estate market is getting quite crowded and good opportunities are becoming increasingly rare.
Securitisation is clearly an important tool for refinancing in the real economy and we see volumes going up continuously. The EU securitisation regulation is today targeting a very bespoke product range, which is great, and we should expect the concept to be expanded. Its success, despite the higher costs, is quite telling and shows that there was a need for harmonisation.
However, this does not mean that the solutions offered outside the EU securitisation will disappear. On the contrary, their volume is increasing significantly and serving different needs.
All of which underpins the importance of the securitisation market, which was asked to leave the room after the last financial crisis but is now very much back on the agenda.
There was a long debate around taxonomy in ESG and what was really meant by it. With the change of regulation at EU level, which was also driven by significant demand from investors, being ESG-compliant is more and more important to managers and banks alike.
We see questions from our clients and direct questions from their investors about the ESG strategy of the product and the parties involved. We are also asked about our own ESG strategy.
Sanne has become a signatory to the UN-supported Principles for Responsible Investment. That is part of our internal evolution around this topic, which includes maintaining the whole infrastructure across products and jurisdictions to support ESG principles and the reporting that goes along with it. The coronavirus hasn’t pushed ESG down the agenda – if anything, it has been moved up now that people have realised just how clean our air and water can be. We will see a new normal emerge and ESG will be an integral part of it.
The key to all of this is regulation. UCITS V and a few other EU regulations are forcing banks and other institutions to offer at least some ESG-compliant products and to invite investors to invest into them, meaning they have to have an offer on the table. The driver may come from regulation but, as mentioned, the investor appetite is definitely there to push.
There are many options to offer ESG-compliant products, but the investment criteria of UCITS funds will also push the raising of listed green bonds. Some stock exchanges, such as Luxembourg’s, have already established themselves as experts in that field and are thus making the product as transparent and liquid as possible.
In conclusion, securitisations will play a significant role in the financing of the real economy and will be an integral part of the solutions offered to professional and private investors.