There is a dilemma that nearly all new private debt managers face. Most will have spent the majority of their career sitting at a desk with a large bank or financial institution and, in most cases, they would have had a big balance sheet to lend with. The trouble is that the big back office that goes with that balance sheet is often taken for granted. Once these managers set up a fund, they realise they are on their own.
Until that point, the mundane aspects of debt management – managing the status of the debt, overseeing corrections in that status, checking how are assets performing – wasn’t their headache. Now they find themselves with a fund, they have a lot more paperwork. They have to think about how they are going to run their business differently and find the right kind of partners to help them do that.
“I have met with a number of portfolio managers launching funds who have said, ‘I am used to making the loans but never had to think much about the operations, the bank handled this,’” says Jason Sheller, head of fund services sales at Deutsche Bank in New York. “Clients are used to having a large professional infrastructure and now they think: ‘How do I replicate this in a smaller private fund? What is the cost? What are the regulatory requirements?’”
Sheller, who describes a growing need among private debt investors for corporate trust services, alongside funds administration, is not alone in his observations. Robert Wagstaff, managing director and head of EMEA sales for BNY Mellon global corporate trust, echoes Sheller.
“If you are an asset manager who has come out of a bank, you are used to buying and selling assets, for that trade to disappear into the back office and for it just to happen. When you move to a direct lender, you don’t have that infrastructure, so they are looking for a trusted partner to document that agreement and follow all the way through.”
Banks like Deutsche Bank and BNY Mellon, and similarly large financial institutions, have been offering corporate trust services – including escrow, loan administration, project finance and trustee services for CLOs – for decades. But now these institutions are increasingly expanding beyond their traditional clientele, which includes multi-national corporations, banks and institutional investors, to encompass a growing private debt universe both on the investor side and the portfolio manager side. Wagstaff says the shift coincided with the explosion of the private debt industry in the aftermath of the global financial crisis.
“When the global financial crisis came, the business saw a real shift from almost 100 percent leveraged finance and CLOs into different assets such as infrastructure, real estate and direct lending, and providing those services not just to SPVs but separately managed accounts and credit funds,” says Wagstaff.
Dean Kennedy, vice president, EMEA product management, at Deutsche Bank corporate trust, sees a similar shift with his bank’s corporate trust business where the global agency business book has seen a growing split between syndicated loan bank debt and third-party loans.
“Approximately 35 percent of our book is now made up of third party and non-bank debt across sectors and asset classes,” says Kennedy. “We are also seeing more debt funds coming to market that can benefit from the front-to-back solution being provided by us as a security services house.”
While the corporate trust industry extends beyond investment banks to include independent, and often specialised, corporate trust providers – and even some boutique providers – large established firms still have some advantages when servicing the private debt space. Kennedy, for his part, emphasises the value of being able to offer seamless solutions by combining its suite of financial services.
“We have done this for many years as an agent and as an administrator, whether that is on the fund services side, the corporate trust side or both as a one-stop-shop. The people and the technology are here, so you get the strength of Deutsche Bank’s infrastructure when you look at this solution.”
In particular, corporate trust providers – as with fund administrators – are emphasising the important role of technology in being able to bring its services together to meet the increasingly complex needs of their growing client base. Deutsche Bank is no exception.
“Deutsche Bank has married its corporate trust team with some very specialised technologies within the fund administration team where we do private equity and alternative hedge fund accounting,” says Sheller. “We integrate those systems and pull the data that is required to help streamline the processing and get information back out to investors in a timely fashion.”
BNY Mellon’s Wagstaff also underlines the importance of being able to leverage a bank’s data resources to meet the information needs of both private debt managers and their investors. He notes that private debt fund managers are often looking for his banks to provide a service that is similar to custody. However, loans and private debt can’t be custodised because they are not issued or traded on a recognised exchange.
“So, for them to feed their fund accounting platforms, they need a trusted party to produce verified reliable financial data about the asset – including data points such as the jurisdiction, the industry, the likelihood of default, credit ratings and some price points – and provide that to them on a regular basis,” says Wagstaff.
He adds that the challenge for the corporate trust business is often investors trying squeeze an illiquid asset class, like private debt, into a portfolio and platform that is not designed for it. Wagstaff notes that there is a lot of demand from insurance companies and pension funds to get greater exposure to these asset classes and the need to be clear as to the way in which they can bring this exposure into their organisations.
“We need to stay at the forefront of trying to make the asset class more liquid,” says Wagstaff. “So that means reducing settlement times, making it more investor-friendly, working with the industry to try and make sure the information can be shared because the more transparent it is, the more investors that can invest and the bigger the market becomes.”