Debt Funds - Sustainable differentiation in a growing market

By Ned Siegel, Brian McMahon

January 2017

In this report, BNY Mellon looks at the challenges and opportunities for investors and managers in the alternative credit market, focusing in particular on the operational requirements that underpin a successful business model and also exploring the key elements of the current market environment.

The alternative credit market is a dynamic, fast-evolving sector in which fund managers are competing fiercely for capital and investment opportunities. In addition, investors and regulators are demanding higher levels of transparency, risk management and governance. In this report, BNY Mellon looks at the challenges and opportunities for investors and managers, focusing in particular on the operational requirements that underpin successful business models.

In six sections, the report explores the key elements of the current market environment:

  • Macro background – Debt funds have become a major source of lending to mid-tier corporates, real estate, and infrastructure projects as banks have retrenched in the aftermath of the financial crisis. In parallel, institutional investors have increased appetite for alternative debt due to low returns from traditional fixed-income assets.
  • Investor demand – Seeking non-correlated absolute returns in a low interest-rate environment, large institutional investors are increasing their allocations to a variety of debt fund strategies. While some are investing in loans directly, many institutions are developing the expertise to allocate higher levels of AUM to debt funds, simultaneously increasing their scrutiny and due diligence.
  • Supply-side response – Hedge funds, private equity houses and asset managers – not all of which are debt specialists – are expanding their activities in a rapidly growing market, adding to competition for capital and transactions. Amid this growth, there is vast diversity between funds in terms of assets invested, structures, liquidity and tenor, with some managers looking to provide a comprehensive range of opportunities.
  • Regulatory context – An evolving regulatory framework is placing greater emphasis on transparency and reporting, forcing debt funds – especially those that originate loans – to provide detailed and frequent information on the diverse asset types they hold. In particular, Europe’s ongoing migration from national to a pan-European regime requires funds to be flexible in their middle- and back-office operations.
  • Building for growth – Increased competition in the debt fund market is encouraging managers to increase levels of specialization and/or size, with implications for their operating models. The often illiquid and nuanced nature of the most attractive assets also imposes administrative burdens on managers seeking to boost investor returns.
  • A maturing market – As business models compete, flexibility is likely to be critical to success in the expanding alternative credit market. Partnership with experienced, scalable third-party providers of depositary, transfer agency, fund administration, loan administration, reporting and accounting solutions will provide debt fund managers with a robust platform for growth.

Frank J. La Salla
Chief Executive Officer, Global Structured Products/Alternative Investment Services, BNY Mellon

This article is provided for general information purposes only and CIBC Mellon and its affiliates make no representations or warranties as to its accuracy or completeness, nor do any of them take any responsibility for third parties to which reference may be made. This article should not be regarded as legal, accounting, investment, financial or other professional advice nor is it intended for such use.

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CIBC Mellon is a Canadian company exclusively focused on the investment servicing needs of Canadian institutional investors and international institutional investors into Canada. Founded in 1996, CIBC Mellon is 50-50 jointly owned by The Bank of New York Mellon (BNY Mellon) and Canadian Imperial Bank of Commerce (CIBC). CIBC Mellon's investment servicing solutions for institutions and corporations are provided in close collaboration with our parent companies, and include custody, multicurrency accounting, fund administration, recordkeeping, pension services, exchange-traded fund services, securities lending services, foreign exchange processing and settlement, and treasury services.

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