This paper explains how financial institutions and their service providers are working in new collaborative and tech-enabled ways to meet client and market needs, deliver returns and manage risks in the post-crisis world.
Originally published in Global Finance, July 2017.
It’s often said technology and regulation are the biggest drivers of change in the financial services industry. If so, the past decade may go down as one of the most tumultuous in the sector’s history.
The transformative power of regulation can be seen in lending trends since Basel III’s capital rules prompted banks to retrench, largely replaced by private equity firms, asset managers and hedge funds. Assets held by private debt managers – self-originated loans and portfolios acquired from restructuring banks, packaged into funds, then marketed to institutional investors – quadrupled to almost USD $600 billion between 2006 and 20161. Meanwhile, global syndicated lending fell 10% in 2016 to USD $4 trillion2.
But private equity firms and fund managers have never established the operating infrastructures traditionally carried by banks, both because of the steep pressures on fees (and therefore costs) in a low-yield environment and the need to respond nimbly to shifts in investor demand. As they expand their private debt businesses, such firms frequently look to third-party service providers to deliver the capabilities and resources required to satisfy the reporting and administrative expectations of regulators and investors on a reliable and scalable basis.
Technology innovations that have evolved quickly in parallel to the finance sector’s structural shifts are critical to supporting its fast-emerging needs. With an extensive corporate trust franchise, BNY Mellon has the domain expertise to help private debt fund managers, investors and counterparties to understand and conduct the valuation processes of highly illiquid and idiosyncratic loans, including the provision of daily NAVs. But that is not enough to continue to meet managers’ operational and strategic needs as private debt matures and diversifies, taking on new assets, risks, structures and customers across multiple jurisdictions. From loan origination to bespoke valuation and reporting requirements, technology is driving the pace of growth and the shape of the new lending markets. Thus, service providers must leverage technology innovation and the increasingly collaborative ethos it is facilitating.
For example, private debt fund and other clients are increasingly accessing our services via our cloud-based NEXENSM digital platform, which not only serves as a single gateway to highly collaborative proprietary tools and transparent reporting capabilities, but also to a curated ecosystem of value-added third-party solutions. Moreover, we regularly invite clients to our global network of innovation centres to better understand their future needs and build tailored solutions that can flex and scale in response to the uncertainties ahead. Transaction structures are overseen by dedicated client service managers, pooling expertise and resources to create tailored solutions which, for example, stream valuation data automatically into clients’ in-house systems, supporting effective risk management and portfolio construction. This means we still ‘sweat the small stuff’, while helping clients to map the path to future opportunities and competitive advantage.
Financial service providers have often been described in adversarial terms, e.g. buy-side versus sell-side, but most organisations have multiple touch points. Regulatory reform and technological disruption have demanded a reappraisal of roles and approaches, forcing financial intermediaries to realise we must be on the same side to meet the long-term needs of borrowers, lenders and investors. Like private debt funds, BNY Mellon is embracing change, deploying technology and working collaboratively to achieve common goals. By rediscovering and renewing this ability to adapt, the finance industry can secure its role in supporting clients well into the future.
1 2017 Preqin Global Private Debt Report