This article is sponsored by SANNE
The coronavirus that has shut down markets globally has also squashed private debt fundraising, at least for the time being. The first quarter had the lowest level of Q1 fundraising for private debt vehicles for more than five years: according to Private Debt Investor research, 24 funds raised $21 billion, around half the figure for the equivalent period in 2019. Stephanie Hopkins, SANNE’s head of private debt and capital markets and country head for Jersey, tells us that although the current environment is extraordinarily challenging, there are some bright spots of opportunity to be found.
It’s a big question, but what does covid-19 and the worldwide shutdown mean for the fund administration industry?
From SANNE’s perspective, we’re constantly monitoring the effect on our clients, our employees and also our business activities. From the client side, information and data are in high demand from GPs and LPs trying to assess the impact on portfolios, investments and funding requirements, as well as operational risk relating to their funds. In particular, they are seeking to understand the impact on cashflows to support drawdowns and distributions. GPs are also seeking greater comfort on key fund operations and the robustness of their service providers in meeting service levels during the lockdown. As a business, we are very active in this volatile market. We’re seeing new opportunities on the deal side with increased focus on covenant protections and greater risk analysis.
We’re also engaged in regular dialogue with GPs, LPs, fund lawyers, auditors and tax advisors. SANNE has a resilient operational framework that means we can quickly provide information and data in response to the changing requirements of our clients.
Are there any particular hotspots?
There is a concern that as liquid markets drop, large institutional investors will be outside risk limits; therefore where managers are issuing calls, some LPs may not be able to fund if they are significantly beyond risk limits, even if they have available liquidity to do so.
Some borrowers may also be at risk of receiving a ‘going concern’ opinion rather than an unqualified audit in connection with their audited financial statements. This, in turn, could affect companies’ compliance under credit agreements and sponsors’ disclosure obligations to shareholders and creditors. Additionally, as companies, including accounting firms, continue to impose travel restrictions in response to government-mandated policies, this may delay the delivery of audited financial statements and could result in breaches of reporting deadlines. On the fiduciary side, regulators and legislators are well aware of the challenges faced by boards and many are implementing relaxations around timeframes and deadlines.
Pricing pressures are proving challenging but the full impact on valuations will depend on how quickly the virus will be contained. Another important factor will be the effectiveness of the measures being implemented by governments to protect the economy.
As the lockdown continues, are clients renegotiating fund terms?
Terms are definitely being reviewed. GPs are examining borrower funding requirements and borrowers are in dialogue around upcoming obligations. Loan terms and covenants are being reviewed. Potential breaches could occur around payment defaults, with financial covenants being tested on a look-forward basis, material adverse change and failure to meet information undertakings. Many lenders are keen to assist borrowers during this time and options to defer interest or agree repayment holidays may well be considered as well as waiving breaches if the documentation allows. Additional lines of credit are also being negotiated to assist with cashflow difficulties.
Has the economic disruption affected risk management and hedging?
The extent to which GPs would have considered the level of volatility we’re experiencing will vary. We would expect risk assessments to change, with increased focus on covenant protections, leverage and refinancing risk.
Hedging arrangements are being closely monitored and the exposures are considered frequently. Hedging arrangements will impact cashflow positions so there is increased focus on upcoming maturities. Information is key for the funds to plan and make decisions – maintaining dialogue with all the parties is important.
How are fund services evolving in this crisis?
Fund administration has had to evolve. Virtual meetings, whether that be board meetings or investor meetings, and video calls are a lot more prevalent than they were before. Regulators have relaxed certain deadlines and filing requirements have changed. On the due diligence and transaction execution side, the requirement for wet ink signatures, for example, is evolving. Among service providers, being able to deliver within tight timeframes is going to be a differentiator. Turnaround times in this current market are short. Experienced service providers with tried and tested operating frameworks will be favoured – GPs are looking for their fund administrator to provide seamless services so they can focus on portfolio management.There have definitely been s ome positive changes and hopefully they will last beyond the crisis.
How vital is technology on a day-to-day basis?
Technology is vital to supporting the strategies and business objectives of our clients. We haven’t needed to adopt any new technology as a response to the current crisis – SANNE already had a strong technology platform – but we have seen an increase in the usage across our applications. Connectivity is critical. Technology that enables us to remain in communication with GPs and LPs is key as well as essential to meeting their portfolio analytics and business intelligence needs. Our role is to manage and ensure the availability of data. SANNE has been able to provide that information at short notice, which is crucial in the current market.
How have you adapted to remote working?
SANNE was well placed to make this transition because we are multi-jurisdictional and already operated quite flexibly in terms of working remotely.
The ability to maintain bandwidth and support remote working for prolonged periods of time will highlight the strong performers in the industry. GPs will definitely look to a service provider that has demonstrated resilience and maintained service levels in the current environment. There will be new considerations when assessing service providers – understanding a service provider’s BCP and technology offering will be more important than it was in the past. Having a fund administrator that is able to maintain high levels of service delivery during this crisis is critical for funds.
Are there specific impacts on private debt funds?
Historically, private debt has been more resilient than some other asset classes during market volatility and downturns. It’s a very challenging environment but there are opportunities. A number of GPs are taking advantage of the need for funding across multiple sectors. We are seeing opportunistic funds and structured vehicles being established, which is positive. There is still the challenge of whether LPs want to invest, especially with such uncertainty. Some LPs will want to take advantage of the opportunities, while others will be more conservative. We have seen this in Q1 with fundraising at the lowest levels in the last five years.