What do private markets funds and their providers have to look forward to next year? for starters, a growth in private debt and a review of alternative investment rules, writes Nicholas Pratt.
There are clear expectations for the private debt market to grow next year – at least, this is what is indicated by our specialist administration ‘vox pop’ of executives within some of the major firms.
Drivers for private debt include businesses having to restructure their loans, and the fact that some of the main lending banks still distance themselves from lending to smaller firms.
In speaking to some of the executives, we also see the rising importance of ESG on the private markets landscape, and we are reminded that next year will see the Alternative Investment Fund Managers Directive revisited by the EU.
ANJA GRENNER, HEAD OF FUND SERVICES SALES, LUXEMBOURG, TMF GROUP
What changes in asset classes have you seen over the last 12 months?
I have seen more weighting and demand for ESG product and allocation within existing asset classes.
Also, artifical intelligence (AI) and ‘medtech’ continues to see strong demand and I expect more capital investment in this area over the coming years.
I also expect growth in private equity evergreen/open-ended funds because fund managers recognise they need greater flexibility on investments and potential exit strategies.
Open-ended funds will negate the time pressure and perceived distressed seller. This could potentially have an impact on the secondaries market if the trend were to evolve.
What regulatory developments will be most important in the months ahead?
All the new ESG regulation and, in particular, the taxonomy regulation in the context of Sustainable Finance Disclosure Regulation as proposed by the EU and to be put in practice from March 10, 2021.
It covers reporting to investors but also requires disclosures in legal and marketing documents such as website disclosures.
A second development relates to DAC6 implementation. Complexities of rolling out DAC6 across the fund industry have created substantial challenges both logistically and operationally for both managers and administrators. Significant investment in reporting and monitoring tools has been required to ensure regulation compliance is met.
AIFMD II is underway and should be transposed into national law in late 2021. It will have impacts on distribution in terms of pre-marketing, leverage, passporting for depositaries and the scope of reporting requirements, amongst others.
RICHARD HANSFORD, DIRECTOR, FUNDS, OCORIAN
What asset classes will be of most interest in 2021?
Private debt. There are going to be a lot of businesses that will need to restructure their debt next year and we will likely see further M&A consolidation, too. As we begin to see government support schemes relax in Q1, large commercial banks remain distanced from lending to middle-market and lower-middle-market companies and so non-bank lenders, private equity in particular, will look to provide capital to those credit-hungry firms through private debt funds. Institutional investors are increasingly engaging with these non-traditional debt options. They provide higher-yielding, shorter-term investments than public bond markets.
Venture capital is another one to watch closely. The pandemic has presented a wide scope of investment opportunities and funds are still sitting on a lot of dry powder they need to deploy. Technology firms have thrived throughout the year and managers will be actively seeking businesses that provide sustainable solutions to the new challenges we will face in the fallout from the pandemic. The challenge for venture capital managers, and particularly start-up managers, is that in times of uncertainty, limited partners look to place their capital with established managers with track records. As a result, a clear differentiation strategy needs to be utilised to stand out in a very crowded fund market.
JAMES BURKE, HEAD OF EUROPE, APEX
To what extent was Covid-19 a disruptor for specialist fund administrators and funds this year?
Covid-19 meant that specialist fund admin firms and other service providers were required to quickly implement business continuity plans (BCP) to cater for the shift towards working from home. However, as the industry is highly regulated, many firms have robust BCP plans already in place with technology solutions which support remote working environments. This meant that whilst certain processes may have needed to be adapted for the change in working style, such as meetings conducted virtually rather than in person, the majority of fund service providers were able to continue to service their clients with minimum disruption during Covid-19.
What regulatory developments will be important in the months ahead?
The tailwind of regulation around the use of ESG metrics in measuring the sustainability and ethical impact of an investment or business has driven ESG to the mainstream and within Apex, we see this as a key regulatory development which will drive change in the coming months. The entire financial services ecosystem, including investors, asset managers, investee companies and service providers, has had to develop and adapt ESG policies in response to this. Legislation has already been introduced at European level with further transparency requirements expected in the future and firms must ensure they have processes in place to capture ESG data aligned to global standards in this regard.
JUSTIN PARTINGTON, GROUP HEAD OF FUNDS, IQ-EQ
What is likely to be the asset class of most interest in 2021?
Private debt emerged as an asset class of choice in the wake of the global financial crisis and it’s likely the global pandemic will serve as another catalyst for its growth in 2021. As banks again struggle with stretched repayments and interest moratoriums amid Covid-19 disruption, opportunities for private debt managers to take the keys from distressed borrowers and turn businesses around could be extensive. Furthermore, private equity managers are increasingly eyeing parallel debt funds to complement their core offering. An increasingly virtual world is also likely to suit the asset class. The velocity of deal-making in the private debt market may in fact increase with less time spent on physical travel and face-to-face meetings.
BRUNO BAGNOULS, GROUP HEAD OF SALES AND RELATIONSHIP MANAGEMENT, ALTER DOMUS
What has been the biggest technological change this year in specialist fund administration and corporate trust services?
Covid-19 has accelerated the adoption of new technology. The need for trusted, secure, remote services has gone from a ‘nice-to-have’ to a ‘must-have’. Many of these trends were already in progress, but we have seen a big drive towards robotics, machine learning and big data analytics in the past year due to the ‘new normal’ shift to everyday life, ignited by the pandemic. Automation is at the forefront of these developments as it provides the solution to many operational challenges imposed by Covid-19. For example, automation has improved this shift in operational demand, including the need for back and middle-office workflow optimisation, improved regulatory compliance efficiency and enabling full remote onboarding.
Before the pandemic, there was a slow but steady rise in remote work in the private market fund administration industry. With more fund administration and corporate trust professionals working from home, companies are working tirelessly to enable employees to be as productive as possible with removing repetitive and time-consuming tasks and streamlining much of the core operational workflow. The need for secure optimisation is more prevalent than ever as remote working has promoted unwarranted cyber threats. Simplifying these processes through ultra-secure fund administration services has enabled private market firms to focus on more crucial tasks, such as investment management and client relationships, as being virtual has made these business functions more important than ever.
IMRAN KHAN, MANAGING DIRECTOR, JTC LUXEMBOURG
Has liquidity management improved throughout the past year?
The liquidity management abilities of investment managers have significantly improved. It is clear that lessons were learned from the great financial crisis in 2009-12 and other impactful events leading up to 2020. This is evidenced by the emergence of a number of funds from cashflow challenges and redemptions suspensions in early 2020, as well as the more frequent and strategic use of alternative liquidity management tools and more measured responses. In addition to redemption suspensions, managers have used temporary borrowing and bridging loans, redemption frequency and settlement periods management, redemption deferrals as well as payment in kind transactions, to manage liquidity.
The aim of these techniques was to navigate through this period without amplifying price declines and maintaining financial stability. Investors and regulators alike have identified real estate funds, high yield bonds and emerging market debt funds as most vulnerable to liquidity risk, which is further heightened during the pandemic scenario. The use of liquidity management tools such as redemption suspensions peaked in the March to April period, driven by valuation uncertainty, reduced cash collections from assets and high redemption requests. A suspension not only represented a negative rating event, but also led to a reappraisal by investors of their own investments criteria and liquidity profile. In some instances, investment managers preferred the use of liability-side liquidity management to avoid redemption suspensions by imposing exit-price reductions.
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