If you tell the average Brexit supporter that the vote they registered on 23 June could lead to an upsurge of capital commitments to the UK’s liquid debt market, you may well receive a blank look. This, after all, was not one of the possible implications of the UK’s vote to depart the European Union that attracted much publicity – and, even if it had, would be unlikely to elicit many emotional responses from ‘main street’.
Nonetheless, it’s an intriguing possibility for those operating in the market and who believe that consultant and investor interest in it is growing. While standalone liquid debt strategies have been around for a while, market sources say combined liquid/illiquid approaches have a growing appeal.
Such a strategy involves an investor handing a mandate to a fund manager that will invest in both illiquid private debt opportunities, with the capital locked away for a period, as well as liquid opportunities that provide the investor with immediate access to the market and the ability to earn yield from day one. It demands close co-operation between the illiquid and liquid investment teams – as opposed to the demarcation and territoriality that some sources confide are more typical of debt investment firms with multiple strategic strands.
PDI understands that consultants are attempting to drum up enthusiasm for the liquid/illiquid debt combo, believing it to be a good liability matching solution for some investors. However, the liquid debt market in Europe is small with only moderate institutional support at present and retail investors barred from participating by the European Union’s Undertakings for Collective Investment in Transferable Securities directive.
Many say barring retail investment in something like senior secured loans – which do not qualify as securities under the UCITS legislation – doesn’t make much sense given that they are acknowledged to be less risky than investment options included as securities by UCITS, such as commercial property and high-yield bonds.
But this is where Brexit comes in. Even if there were enthusiasm for changes to UCITS, every single European finance minister would need to sign up to it. It’s hard to believe it would ever be a high enough priority to make that happen. But once the UK is going it alone, decisions in areas such as this will pass to the Financial Conduct Authority. It is currently unclear whether the FCA might be in support of retail investors playing a part in the loan market but, if it were, then that change could almost certainly be made to happen relatively quickly.
On the other side of the Atlantic evidence of retail interest in private debt can be found, with capital largely from that source helping to grow market capitalisation in the US business development company sector to more than $32 billion (according to Closed-End Fund Advisors’ BDC Universe). A similar unleashing of retail investment in UK liquid debt may one day become a consequence of Brexit, albeit not one likely to make the front pages.