Charles Le Cornu, Head of Private Debt & Capital Markets
Just as regulation and demand for private debt has driven fund innovation in Europe, similar trends can be seen in the US. Charles le Cornu, Head of Private Debt and Capital Markets at SANNE, explores the transatlantic parallels.
The alternative funding market has seen significant growth over the last few years, as have the private debt funds within it. This has been driven in part by the creation of the capital markets union, charged with mobilising capital in Europe which has acted as a fundamental catalyst for the continued strength in alternative lending platforms. In addition, the ongoing bank disinter-mediation across Europe has continued to attract fund managers to the direct lending space as regulations introduced after the global financial crisis make it harder for banks to provide financing to businesses.
As European banks shed assets, our view is that this trend will only feed the demand for private debt. The same is true for the more mature US market, where private debt products continue to account for a significant proportion of the market. PDI data indicate that investor appetite for private debt in the coming year should be stronger than it was over the past 12-month period. Investors also note that their private debt investments lived up to their initial performance expectations. As a result, investors retain a generally positive perception of the asset class.
The latest figures confirm this view. Sixteen US-focused private debt funds reached a final close in Q1 2017, with approximately $16 billion of committed capital. There was an increase of $12 billion in capital raised by funds reaching a final close when compared with the same quarter last year. Globally, private debt had the strongest quarter in the history of the asset class in Q4 2016 with over $46.7 billion raised across 52 funds.
This growth pattern is set to continue, particularly within the growing European market where banks have been reducing their balance sheets materially following the global financial crisis in 2008. In addition, the quantitative easing programme undertaken over recent years suggests that interest rates should not rise significantly in the short term. Regulatory change continues to advance and will likely continue to impact credit institutions and consequently aﬀect the European economy, resulting in a clear requirement for alternative forms of lending. From an investor’s perspective, the low interest rate environment means that the search for yield continues. In an environment where some are borrowing at negative rates, private debt investments can clearly oﬀer appealing returns.
The 2007-08 global financial crisis triggered the heightened regulatory environment that we now see today. The administration industry has adopted the attitude that it needs to continue pushing boundaries. This drive is representative of an industry that is coming of age. We see administrators are increasing their engagement with fund managers, while they too are speeding up their own pace of innovation.
“As European banks shed assets, our view is that this trend will only feed the demand for private debt. The same is true for the more mature us market, where private debt products continue to account for a significant proportion of the market”
Increased regulations have made investors more risk averse, driving further transparency requirements. We see this as an ongoing trend with workloads increasing in the future as opposed to reducing.
As such, there has been a fundamental change in the role of fund administrators since the crisis and the regulatory adjustment that followed. The same themes are noted consistently following the implementation of the retail distribution review and similar legal frameworks globally. It is clear that regulatory change and investor appetite for transparency have seen the role of the fund administrator become increasingly important and more varied, with workloads increasing as a result.
Operationally, gone are the days when clients review every piece of information reported by the fund administrator. Fund managers have adopted an outsourcing arrangement, and quite rightly, expect exceptional service with very high levels of accuracy. Fund administrators are now truly an extension of the fund manager’s team and are expected to contribute materially to the overriding investor experience. The onus is therefore on the administrator to consistently add real value, whether that be providing exceptional system capabilities, regulatory expertise or compliance over and above the normal ‘business as usual’ service delivery.
It is also clear that there has been a material uplift in compliance requirements together with a heightened need for expensive financial reporting and IT infrastructure, making the use of a third-party fund administrator an attractive proposition for asset managers. Pressure on management fees often increases this appeal further as outsourcing may be cost eﬀective over the long term when compared to in-house recruitment costs, ongoing training and IT spend.
However, there is still a requirement for financial services professionals to be genuine experts in their field regardless of system capabilities and infrastructure. In our view, this requires a team of highly skilled professionals, supported by best-of-breed systems and robust policies and procedures. Over recent years, we have noted a requirement to go above and beyond these areas, taking a more proactive approach to risk management generally, cybersecurity and KYC collation. These collectively are focused on protecting and ensuring our clients’ data is accurate and safe.
TECHNOLOGY AND SECURITY
In the case of cybersecurity, the threat has increased exponentially over recent years and is something that SANNE has continued to monitor. Our team has developed future-ft solutions allowing our clients to remain leaders in their fields by being abreast of regulatory and system changes. In our experience, managers are becoming increasingly sophisticated in their approach to cybersecurity generally. As such, questions around cybersecurity processes and procedures are now a routine aspect of every operational due diligence inquiry by fund managers and their investors. Protecting the personal identities of investors is essential to fund managers first and foremost, as regulators take investor protection very seriously. Interestingly, Trident Capital’s cybersecurity venture fund recently raised $300 million to invest in cybersecurity startups. This clearly demonstrates the ever growing focus on cybersecurity and the opportunities that have been identified
in this space.
This focus has been further highlighted by the Alternative Investment Management Association, which published an updated guide for asset managers to utilise when selecting a fund administrator. It also highlights the metrics by which current service providers should be judged when appraising their ongoing performance. The AIMA noted items to be considered, including transparency, system capabilities and forward-looking IT infrastructure.
Ultimately, administration service providers and asset managers work together for long periods given the long-term nature of close-ended funds. A key driver for asset managers is to partner with successful fund administrators who have similar long-term ambitions and an appetite to develop and grow their service oﬀering in an ever-increasing number of areas, but with enhanced IT capabilities and infrastructure.
As a global provider of alternative asset and corporate administration, with presence across the Americas, EMEA and Asia-Pacific our team of industry professionals have developed systems to help investment managers remain future-fit. We are able to embrace the burden placed on investment managers, so that they can focus on managing their funds and generating value for their investors.
Authored by Charles Le Cornu | Head of Private Debt and Capital Markets at SANNE. This article was published in the PDI US Report, September 2017 edition. To view the entire publication, please click here.