Viewpoint: quotes from depositaries

Elaine Furnari

Head of Loan Services Citco Fund Services (USA) Inc

Given the recent pull back in lending from the traditional banking sector, private debt markets continue to be a key source of funding and capital.  As such, originators are placing more reliance on administrators and asset servicers who can manage the full operational life-cycle, whilst providing a platform that provides for accessibility and curation of underlying loan data that is critical in making business decisions.

Shane Hurley

Executive Director, Head of J.P. Morgan Depositary Bank Services, J.P. Morgan Bank Luxembourg S.A

Considering the “higher for longer” interest rate environment in response to stubborn inflation, private credit funds have remained resilient despite emerging headwinds for underlying borrower costs.  Luxembourg private credit funds managed by specialist firms continued to witness growth with strong emphasis on credit quality particularly around the potential risks of less favourable economic outlook and/or increased default risks.  Looking ahead at the opportunities, we could expect the continued convergence of public and private assets (hybrid funds) requiring Luxembourg depositaries to adapt and devise their operating models accordingly.

Andrew Ritchie

Vice President Alternative Asset Services at Brown Brothers Harriman, London

Private debt remains an attractive asset class given its floating rate returns, risk diversification and structuring flexibility. Fund raising has been strong but is likely to grow at a slower rate than in 2022 as investors consider the macro implications of inflation and interest rates. However, private debt assets under management are expected to be in excess of $2 trillion by 2027*.

Daniel Engel

Head of Business Development & Relationship Management, Edmond de Rothschild Asset Management (Luxembourg)

We continue to observe that the private debt segment is contuing its growth trajectory. In the current market of raising interest rates and high inflation, the sector remains highly attractive. The core fundamentals remain intact therewith representing a strong alternative to fixed income investing, which continues to fuel this growth. In parallel we have also seen strong increase in the number of investors keen to increase their exposure to the segment. As such we have focused strongly on enhancing our investor experience by widening our digitalization strategy.

Greg Myers

Global Sector Head – Debt & Capital Markets at Alter Domus

Incredible growth in distressed debt and special opportunity funds. First, there’s the legacy effects of a long-term zero interest rate environment, and the proliferation of dividend distributions from a lot of LBOs, especially from the sponsor finance community, or private credit funds. They were done when rates were low it was one floor or two for reference rates, and now it’s ticking up to the five range. And with these legacy spreads and the current reference rates, some of these companies can't afford that debt service as part of their operating model. That’s starting to trigger a lot of the EBITDA covenants within their underlying credit and lending agreements.

So we've seen a lot of our traditional private credit lenders and opportunistic managers launching special situations and credit opportunity funds, where they can step in, restructure the debt, and maybe put it on non-accrual or non-cash pay for a period of time to work these deals out. There was a bump in these funds being formed at the beginning of covid, with the assumption the pandemic would create a boom in distressed situations for the then pending economic distress.

Robert van Kerkhoff

Head of Luxembourg, Ireland and Channel Islands for Securities Services, BNP Paribas

Despite fundraising slowdown, the Private Debt segment remains very attractive thanks to its core fundamentals: higher risk-adjusted yields, resilience to market volatility, various strategies and products, and protection from interests rates increase due to their floating characteristic.

Guillaume Castel

Head of Alternatives Luxembourg, State Street Bank International

The Private Debt market remains attractive to our clients even in a higher interest rate global environment. As traditional banks have tightened their credit activities further in 2023, Private Markets continue to step in. The lending conditions for lenders remain favorable even if the changing economic landscape is making direct lending deals more difficult to arrange and costly for borrowers.

Guglielmo Manzoni

Head of Depositary and Fiduciary Services, HSBC Continental Europe, Luxembourg

Private debt as an asset class is still growing as it may offer attractive returns above those of public markets. The legal framework of Luxembourg for alternative funds like private debt is seen as the best in class and the recent modernisation/changes in the laws on SICARs, SIFs, RAIFs, UCIs, and AIFM introduced by the Luxembourg legislator in 2023, are adding to the attractiveness of the market place. From a regulatory standpoint the developments brought up by AIFMD 2 and ELTIF 2 will require additional scrutiny and monitoring from a Depositary standpoint. This makes it even more important for Depositaries to be part of a servicing model where fund administration, loan agency, loan administration and banking solutions are part of an integrated end-to-end model. The close interaction and exchange of information/documents through automated interfaces amongst the various actors therefore continues to be a key factor to succeed in this space and for Depositaries to perform their oversight duties efficiently and effectively.

Disclaimer: The views and opinions expressed are for informational purposes only and do not constitute investment or legal advice and are not intended as an offer to sell, or a solicitation to buy securities, services or investment products. All the information set out in this quote is provided on the best of HSBC’s current knowledge and understanding of the relevant law, rules, regulations, directions and guidelines governing. HSBC makes no guarantee, representation or warranty and accepts no liability as to its accuracy or completeness. Future changes in such law, rules, regulations etc. could affect the information in this document but HSBC is under no obligation to keep this information current or to update it.“

Eduardo Gramuglia

Head of Securities Services BeNeLux Citibank Europe Plc

With the increased focus on the UN Sustainable Development Goals we are seeing continuous growth of Impact Funds in the alternative funds segment as a way to channel suitable financing for projects. Private debt finance is extensively used in public-private-partnerships (PPP) with development banks, agencies and governments. Through loan and debt instruments funding is provided to sustainable projects with a positive social, environmental impact or better governance outcomes. Partnering with the fund sponsors and PPPs, Citi has developed a specialised service offering for Impact Funds in this growing alternative fund segment.

*Source : Preqin