Last year was a bumper year for fundraising in private debt and, although 2018 has dropped off slightly, it looks like the real pressure is now on putting that capital to work. The amount of dry powder in the market is high and it feels like competition for the best deals is fierce. The burden on managers to deploy the funds they have raised is likely to impact the selection process and potentially extend the scope of deals considered.
Because of this we anticipate asset allocation to be key for investors when selecting a manager and their deal pipeline to be scrutinised more than it has been historically. Speed to market and flexibility will also become increasingly important differentiators. So, it is important that fund administrators are quick to react to ensure the deal teams are not slowed down unnecessarily by administrative elements of an investment.
The market has seen a steady creep of covenant-light deals, which has now even penetrated the mid-market in the US, which is something we didn’t even see in 2006 and 2007. Coupled with increased leverage, required to provide the return investors demand, this could pose some challenges during the next cycle. As Warren Buffet once said, “only when the tide goes out do you discover who has been swimming naked”. Over the past decade, we have had experience in dealing with workout scenarios, acting as directors for funds when transactions have not performed as anticipated and we can use that experience to assist the funds we are mandated on should such events reoccur.
We have witnessed an increase in the number of investors that want to perform due diligence on us and we anticipate this will continue. We see this trend making it more difficult for the smaller players in our market given how detailed the due diligence questionnaires have become. For this reason and the amount of private equity money in our industry we expect to see a continued consolidation of service providers until we are in a similar position to the audit world and there is a big four or five administration firms.
As with all industries, technology is playing an increasingly important role. Some might believe that advances in technology would be competition for the outsourced service industry. However, we see it being a benefit. Technology in our industry improves availability of information, reduces the potential for manual error and increases efficiency through increased automation. Fund managers might invest in technology such as artificial intelligence using algorithms to forecast the performance of an investment or the risk of default. However, do they also want to spend money on the best-in-practice accounting software or KYC database or investor portal when they could employ a service provider who uses all of these products as part of the standard offering?
“The world is becoming smaller. Investors are looking increasingly at multi-regional strategies and more funds are raising capital globally”
We also see advances in technology playing an increased role in the types of transactions brought to market. SANNE were appointed on some of the earliest and most high-profile peer-to-peer deals and we were quick to realise that as technology advances it is important to stay in touch and evolve with the landscape or be left behind. Jersey, where we are headquartered, has been home to a number of Europe’s ICO’s and this is another area that could potentially grow in importance. How cryptocurrencies and blockchain technology will impact our industry in the long term is still to be seen. However, it is important to appreciate the importance of developments in this space and invest in research, understanding and consider the potential.
The world is becoming smaller. Investors are looking increasingly at multi-regional strategies and more funds are raising capital globally. We have witnessed an increase in investment from Asian institutions and it looks like this trend is set to continue. As previously mentioned, investors are also taking a keen interest in who is administering the funds they are evaluating and therefore obtaining globally recognised accreditations for the processes and controls in place will continue to be an area of focus. We have invested a lot of time and money on ISO and ISAE accreditations since we appreciate the importance our managers and investors place upon such accolades and the comfort they provide.
Since the financial crisis, regulation has increased exponentially. Politicians and policy makers have been busy ensuring that the finance industry will not be allowed to “get away with it again” and oversight and risk management appears to be the methods of choice. We have seen AIFMD to protect investors in alternative assets in Europe, FATCA and CRS to ensure compliance with tax obligations and BEPS to deal with large corporates not playing nicely. With the exception of the current administration in the US, it looks like this trend is set to continue. Although managers see much of this regulation as necessary today it is again an opportunity for the outsourced service industry. We prioritise horizon scanning to ensure we can come to our clients as early as possible with solutions for future developments. We work with industry bodies to adopt best practice and communicate this with our clients to ease the burden and add value.
One consequence of the increased regulation through acts like Basel III and Dodd-Frank has been the well-publicised retreat of the banks from the SME lending arena. Most commentators expect this to continue although the retreat has happened at a different pace or extent from jurisdiction to jurisdiction and country to country. Markets such as Germany for example, are still overbanked and have been talked about as the next big private debt market for some time. To what extent private debt flourishes in each particular market is still to be seen but we fully believe that the asset class is still in its infancy and is here to stay.
This article was sponsored by SANNE. It appeared in the Future of Private Debt special supplement that accompanied the October 2018 issue of PDI magazine.