By: Bill Bormann & Mark Kahn
Direct lending is a compelling investment opportunity for alternative managers. Risk-adjusted returns are above the line (versus traditional, risk averse fixed income) and lucrative fees boost spreads. The market is very opportunistic now that hedge funds collaborate with private equity firms to compete directly with traditional banks. This provides borrowers with flexible financing terms, incentives, and options.
Globally, the opportunity for direct lending is very significant. For example, as vast numbers of Euro bank-provided real estate loans mature in the next few years, borrowers will need to refinance. In many cases, the real estate assets are at 80% loan-to-value levels, which are below bank requirements. Traditionally, European banks would refinance a percentage of these loans. In today’s marketplace, banks may choose not to refinance, leaving room for hedge funds to step in.
Alternative managers who choose to enter the fray will face some challenges. For example, many do not have the technology or expertise to handle this complex asset class. They must decide if they should invest in technology infrastructure and expertise, and build and maintain the environment, or try to manage the assets on ill-fitting existing systems and infrastructure. All of these options are costly and risky.
However, there is an alternative. Managers can outsource or co-source with SS&C. Outsourcing/co-sourcing enables managers to access the technology and expertise at a fraction of the cost. The solution also helps manage risk. If the manager opts to exit the strategy, it’s easier and cheaper to end the service agreement than it would be to exit after investing in technology and infrastructure. Asset managers do not need to replace their current administrator, nor do they need to invest in new infrastructure.
Instead, you can “plug into” our platform, and we support you. We support the entire direct lending process, from origination and closing through servicing, accounting, and reporting. We currently work with some of the world’s largest managers, and are poised for growth.