Crisis accelerates changes already underway in PE space

By Audrey Nangle

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What happens when you take a part of the investment industry that was already changing and subject it to a profound shock? That’s the question that will challenge private markets for the foreseeable future.

The landscape was already in flux when the novel coronavirus came onto the scene. Now, some funds are experiencing or anticipating major financial disruption, while others are finding unexpected gains and opportunities. 

Even before the coronavirus outbreak, there were numerous drivers in motion. The playing field had become more competitive and returns had become harder to achieve, particularly for some hedge funds. New regulations, a push for more transparency and investors’ demands for more involvement were already having a strong impact. Cost-consciousness and fee scrutiny were also well underway. 

In response to the complex forces at work, managers and investors have become more creative and flexible in their approach to investment. As the turmoil continues, a few trends in private markets stand out:   

Funds and investors are fluid

Even before the current sea change, funds and investors were stepping out of their traditional lanes to expand the pool of opportunities. The evolution continues. Hedge fund managers, for example, are launching private equity and debt funds. Smaller investors are moving into venture capital that allow more modest commitments. 

Hybrid funds, with characteristics of both hedge and private equity funds, are also on the rise. Many investors expect hybrid funds to offer more predictable liquidity and better cash flow, helping to boost the probability of long-term success even in the midst of a crisis. 

This crossover, however, is likely to be impacted by shifts in fundraising and dealmaking. With so much uncertainty, many funds are anticipating a decline in dealmaking, given the higher scrutiny, increased due diligence and difficulty in determining valuations. Financing could also become more tenuous although the stockpile of capital, particularly in private equity, provides a substantial cushion.

Global instability and its impacts are also likely to accelerate another trend. If fundraising lags, some smaller funds could close, paving the way for megafunds to continue the massive growth that has occurred over time. 

In these times of change and uncertainty, there is great opportunity for some fund managers, particularly for private funds with unused committed capital. An example of this would be debt funds, which are expected to see rapid growth in the volume of distressed loans over the next few months.

Investors seek greater involvement

Investors of all types are demanding more transparency and information. In some cases, general partners and limited partners are having conversations at a fund’s inception. There is more and earlier negotiation over fees. 

Co-investments are also becoming more common, with insurance companies and pension funds among the leaders in seeking these opportunities. In some cases, institutional investors will be among just a small group in the co-investment, giving them more say and influence over what happens in the fund.

Limited partners of all types are looking to further diversify their portfolios, whether that means new sectors, geographies or strategies, and are seeking more information as they expand into less familiar areas. 

On the regulatory front, Alternative Investment Fund Managers Directive (AIFMD) is mandating greater transparency. That may be reassuring to investors but it comes with a literal cost, as both time and monetary resources are being used to meet the requirements. As these expenses are paid for by the funds, ultimately the limited partners are picking up the bill.

In addition, the IRR of the fund is being hit, which results in lower carried interest. This, in turn, has an adverse effect on the fund managers and their cash flows. All of this is exacerbated by the fact that AIFMD and other regulatory schemes are not always written to accommodate the complexity of private investments. 

Private equity firms are branching out

To lower their risk of exposure and find new sources of returns, some PE firms are broadening their investment strategies. They may be launching venture or debt funds, or pursuing themes that are outside their traditional areas. To help drive success, they are seeking thematic experts to direct their strategy. This has led to demand for sector experts and even the acquisition of firms with particular expertise.

With the pummelling the world economy is taking, some firms are looking at distressed debt and others private debt and credit strategies. The focus is on entire industries that are now struggling, including energy, travel, non-streaming entertainment, retail and restaurants. In these cases, the closed ended nature of the private investment structure should give comfort to fund managers as they wait out this difficult time.

There is often opportunity in down cycles and firms are also considering industries that have gotten an economic boost from the coronavirus. The changes in how people are living now – working from home is the new normal, students are immersed in online learning and tele-health has become a necessity – could persist even after the pandemic is contained and boost related sectors.

As funds and investors struggle to find opportunity and minimise undue risk, they are taking new paths and building new relationships. It’s difficult to predict what will happen in three or six or twelve months. One thing is clear, though: the private markets industry was already in flux and those changes will only accelerate and reshape the industry in new and indelible ways.

By Treabhor Mac Eochaidh

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Treabhor Mac Eochaidh, head of debt services at MUFG Investor Services, says improving legal and tax frameworks are driving investor interest in Asian credit.

As the hunt for yield steers investors towards different markets and regions, Asia-Pacific has emerged as the next big growth area for private debt. Until recently, investors had approached the region with caution, as they recognised its significant potential for both yield and volatility. Lately, however, they have become more reassured by the steps many Asian markets have taken to protect investors by shoring up legal frameworks and tax transparency.

Consequently, asset managers have expanded their presence in the region beyond established markets such as Australia and Hong Kong to launch operations and invest in funds in more frontier corners like Indonesia, Vietnam and Cambodia. Investors have identified prospects in strategies that involve real estate infrastructure loans, special situations and mezzanine debt in these countries. They also see promise in some distressed debt opportunities in India and China.

Fundraising falling, yet opportunities abound

Private debt markets across the globe continue to remain popular among investors owing to the reliable income, diversification and downside protection that the asset class generally promises. However, fundraising in the space struggled throughout last year, according to Private Debt Investor’s Fundraising Reports, amid widespread uncertainty about how geopolitics and trade policy would affect the global economy and interest rates. Fundraising numbers for 2019 slipped to their lowest level in four years.

Even so, Asia-Pacific, starting from a low base, shows substantial room for growth. Investors recognising this potential have tiptoed into the region. Behind the trend, asset managers have noticed that returns in more established markets, such as the US and Europe, have begun to plateau in some sectors, making investments in Asia-Pacific more attractive.

Meanwhile, Asian banks that had mostly escaped the more damaging effects of the global financial crisis over the past decade are now hearing calls for additional capital requirements. As these institutions slowly deleverage to meet the new constraints, direct lending and other private debt opportunities have emerged to fill the gaps by offering loans ranging mostly between US$25 million and US$100 million, thereby generating robust yields.

Where investors are finding the yield

Investors are finding success using different strategies, such as real estate infrastructure loans and some special situations, despite varying levels of risk across the region. Asset managers spy considerable yield potential in infrastructure loans, as countries in South-East Asia have sizeable construction needs, even amid underdeveloped regulatory and legal structures and light enforcement.

Ample real estate construction and debt issuance in Vietnam, for instance, has introduced direct-lending opportunities for investors. In response, asset managers have been pushing regulators there to tighten rules and protections. Cambodia, with its proximity to China, has also seen activity in the infrastructure loan space.

Asset allocators have shown some interest in Australia and India for special situations, which involve making private-placement loans to distressed companies whose valuations investors expect will rise. The allure should only increase as regulations strengthen and investors feel more effectively shielded from the risks.

As banks tighten their capital deployment, the mezzanine sector has also grown. Here, lenders are allocating to debt funds that provide higher yield, but which have less protection and claim to a company’s assets should borrowers default.

Indian banks, for example, hold many non-performing loans with several tranches of investors. The covenants, or protections, are strongest in the senior-most A and B tranches. But the mezzanine level lying beneath those tranches commands higher yields for its more risk-tolerant investors: at about 6 percent, compared with the 3 percent that investors in the A and B tranches receive. Still, some asset managers hedge their bets by buying the A- and Blevel debt alongside the mezzanine-level debt.

Investing where 37 percent of the world lives

Investors have discovered many distressed-debt opportunities in India and China. After years of unprecedented growth, China’s banking sector has seen a lot of distressed debt accumulate. Even though only a small portion of Chinese banks’ loans have entered the distressed space, it nevertheless represents a large number with substantial yield potential for investors.

In recent years, the Chinese government has lowered barriers to foreign investors in its effort to help banks offload their distressed loans. But, even here, the banks try to keep the higher tranches and seek to offload the less protected, riskier debt on to yield-hungry investors.

State-owned Indian banks hold large numbers of NPLs, opening up the market to high-yield opportunities for foreign investors. Similarly to China, the state wants companies and investors to take the riskiest tranches of these loans off its hands.

But though investors remain cagey about India’s weak legal infrastructure and cumbersome bureaucracy, they are still opening offices there. Many find the country’s NPL ratio – 15 percent, compared with 4 percent throughout the rest of the region – too appealing to ignore.

As interest rates hover around historic lows across developed markets, demand has grown for higher-yielding private debt investments issued in lessdeveloped markets, such as Asia-Pacific. Investors recognise how some debt instruments in the region offer yields not seen for several years in equivalent US and European assets. Meanwhile, demand across Asia-Pacific for loans to fund real estate and infrastructure projects should continue to be robust.

Conditions remain ripe for healthy returns in private debt across Asia-Pacific over the next five years. But investors chasing these attractive yields need to do their research, ensure they are properly protected and choose their assets – and markets – carefully before they embark.

By Cliodhna Murphy

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In the wake of the 2008 global financial crisis (“GFC”), the requirements for transparency, control and customization across entire investment programs became all the more apparent.  Amidst the call for these industry changes, separately managed accounts (“SMAs”) became a popular portfolio structure that offered investors many of the freedoms they were looking for. In parallel, consideration of environmental, social and governance (“ESG”) factors has become a mainstream topic of investment discussions across the world, and responsible investment practices and evaluation criteria have had an increasing influence on how investment decisions are made.

Now, as we navigate the COVID-19 pandemic and the current crisis both inside and out of the financial sector, it is worth reflecting on the factors which have driven the increased popularity of SMAs and exploring whether these vehicles could see a rise in popularity as a means of accessing ESG strategies.  Through examining these factors, we can explore whether the demand for these vehicles may be impacted by COVID-19 and whether SMAs could become the structures of choice for ESG-savvy investors.


As calls for greater transparency mount, partly as a result of the natural evolution of the market and partly as a reaction to events, technology has kept up with growing demand.  Full transparency of position-level data for alternative investments has historically been costly and cumbersome. However, there are now cost-effective technology solutions to efficiently process the extra data that arises as a result of the demand for full transparency.  By carefully managing the complex additional data, risk management and performance analytics are strengthened, which can help with both portfolio construction and ongoing monitoring.

Transparency is crucial for investors who are looking to measure ESG considerations across their entire portfolio.  To date, there has been a marked focus on ESG considerations within publicly listed companies, while private markets currently lag behind.  However, for effective ESG scoring across an overall portfolio composition, allocations to alternative assets cannot be ignored.   

We continue to see methods for collating ESG data evolve and improve, as greater collaboration sets clearer standards and definitions, and concerted efforts by all parties across the investment ecosystem drive positive change. But none of these factors can be monitored or measured by investors without underlying transparency on what exposures their portfolios are taking. Because of this, investors are likely to gravitate towards more transparent investment vehicles such as SMAs to continue holding themselves to the high standards they look for in the companies in which they invest.


SMA structures offer a number of important control features that are not available through the use of commingled investments.  First, they are by definition segregated, thereby removing co-investment risk and increasing oversight. Legal ownership of the assets in an SMA rests with the single SMA investor, so these structures offer significantly higher protection than commingled vehicles in the event of a default.

Particularly of interest for investors who are looking to apply ESG criteria is the ability for investment guidelines to be customized using SMA structures. Investors also have greater control over the liquidity of the underlying assets within SMA structures and can pivot more easily between lending and borrowing, which is especially important during periods of market stress.

These characteristics helped propel SMA structures into the limelight post-GFC and may do so again following the COVID-19 related market volatility we have seen in this year.

One of the key reasons SMAs saw so much interest post-GFC was their ability to individually tailor liquidity terms for each portfolio.  The process of setting up and customizing an SMA often brings managers and investors closer together and leads to more frequent and meaningful dialogs. Coupled with the additional transparency that SMAs offers, this expanded communication often leads to allocations that tend to be longer-lasting.  Therefore, although liquidity terms may allow for swifter exits, in practice this isn’t always the case.


As we continue to navigate the economic impact of the COVID-19 pandemic, investors are likely to call for more transparency, control and customization, and to continue the drive towards responsible investing.  Fund managers eager to successfully seize new opportunities will be ready to meet these demands.

SMAs deliver the required features and allow investors to design their own ESG bespoke products, which can be independently monitored at a position level.  Asset servicers play a valuable role to help collect and collate information from private firms to help both investors and managers make more informed, responsible investment decisions. 

The full effect of the COVID-19 pandemic on global markets is still unclear, however there are some early indications that ESG indices have outperformed their peers as highlighted by MSCI (blog) and that ESG funds have not suffered the same outflows (Schroders).  Although it is too early to effectively draw a meaningful conclusion, given how society has responded to previous socially and environmentally impactful events, investors and fund managers should expect to continue to see responsible investment becoming the norm.

By Treabhor Mac Eochaidh, Head of Debt Services

The extreme market volatility and uncertainty brought on by the COVID-19 pandemic is widening the discrepancy between buyer and seller expectations for private assets. This is putting unique pressure on debt covenants and legal documents. Disruption to transactions are quickly increasing as banks put new deals on hold and multiples compress from over six times earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2019. As the industry is experiencing record levels of dry powder needed to be spent, distressed debt funds are well placed to take the lead while private lenders are poised to fill the gap of banks retreating. The global financial crisis (GFC) in 2008 caused similar economic and financial disruption. However, this time around private debt funds have more than three times the assets under management with significant capital to be deployed and that may provide financing and liquidity that was not available during the previous crisis.

Covenants and legal documents are likely to be tested

It’s clear that in the wake of the novel coronavirus pandemic we are going to see an increase in distressed / private debt. There will be lead-in time as covenants are breached, and lenders and borrowers assess all options open to them, with a swing back in favor of lenders but it will look different to post GFC.

Defaults on payments will be what comes through first and we expect to see a lot of amend and extend restructuring to help borrowers get through the short-term to mid-term liquidity gap.

The speed at which this downturn is unfolding probably means that covenant-lite loans will trigger quicker than expected. Alternative lenders on these loans will be able to look at the price of the collateral which will have dropped considerably and use that as the trigger. If the investment strategies are more credit opportunity focused for example, they will be looking at the fundamentals of the borrower over the long-term.

For many lenders, this is the first time loan documentation will have faced major tests to see how well they protect all parties.

Managers are positioning themselves to work in the direct lending space

Even prior to this pandemic, direct lending established itself as an asset class over the last decade. Thus, the industry is more mature for both lenders and borrowers to seek opportunities. More managers are positioning themselves to be in the best possible position to work in the direct lending space.

Managers are going to be focused on being opportunistic. They’ll be looking at how they can best handle opportunities coming down the road, looking at which companies are overleveraged in the short term but are fundamentally strong companies.

MUFG Investor Services: a partner ready to support new business

As allocations to direct lending rise, it’s critical that institutional investors understand the bespoke nature of and the risks associated with the asset class. MUFG Investor Services are ready to support new business as well as build on existing relationships in the direct lending space with a loan ecosystem designed to ensure the quality and accuracy of this complex asset class.

MUFG Investor Services direct lending operating model includes a powerful and flexible loan record keeping platform that models complex loans and tracks ongoing principal and interest activity over the lifecycle of the asset (acting as a sub-ledger to other core platforms).

If you’re pursuing direct lending, syndicated loans and distressed debt, look no further than a team of experienced industry professionals strategically located for all time zone requirements and reach out today. For more information and queries our debt team can be reached at

By Ankur Saxena

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Ankur Saxena, product development, client facing technology at MUFG Investor Services, outlines the five criteria firms should base their decisions when selecting their ideal provider.

With rapid advancements in data and analytics, today’s client-facing technology (CFT) has emerged as a competitive advantage for funds. It encompasses data, analytics, projections and other critical information – all personalised for investment managers and their clients.

As technology capabilities have soared, so too have client expectations. Investment managers, however, are hampered by outdated and fragmented legacy systems across accounting, investor relations, FX, regulatory reporting, cash investment management, investor services and other functions. Their clients’ experiences are similarly lacking and often cast the fund in a bad light.

Inadequate CFT has a huge downside. It limits information, lacks specificity and personalisation, and decreases a firm’s competitiveness. CFT is the firm – what it does, how it’s experienced, its strengths and differentiators – and it needs to be a prominent advantage. Many funds’ investment managers are therefore looking to upgrade, sometimes dramatically, to improve their experience and that of their clients.

The first issue for many is whether to rely on internal resources or, as is increasingly common, look to a specialised outside provider. Whichever route they choose, they will see the benefits.

Quality CFT can drive transformation by bringing enhanced business intelligence, analytics and reporting capabilities. Intelligence can be easily organised, reported and distributed, and analytics makes it possible to automatically build patterns and relationships across structured and unstructured data.

CFT enables faster processing of information, and reduced turnaround times for net asset valuation and other real-time calculations. As artificial intelligence and shared platforms become more prevalent, managers can predict outcomes with more certainty and make more informed decisions.

From a security standpoint, CFT enables transparency and control over information flow, with granular security permissions. It also allows firms to adopt more sophisticated data loss prevention tools and techniques.

Further, more CFT providers are going beyond traditional fund administration capabilities, assisting managers with operational overheads, processing and servicing challenges, and developing innovative ideas.

Guidelines for choosing a CFT provider

After weighing factors such as cost, maintenance and upgrades, many funds are opting for partnerships with CFT providers. Identifying and vetting providers can be challenging. Trust is an important consideration. Funds should investigate the provider’s history of delivering (or not) on projects, its leadership, and its presence and perception amongst the investor community.

As funds look to enhance their capabilities, they can get a clear understanding of the provider’s ability and suitability for their firm by asking questions in these five key areas:

1. Capabilities and integration with current systems

  • What is the platform architecture?
  • What is the integration process?
  • What is the ability to extract or ingest data from the platform?
  • What are the reporting capabilities and is there real time or near time availability of data?

2. Personalisation

  • Does the provider have custom solutions for different types of investors and fund types?
  • Can it accommodate custom reporting?
  • What will the client’s dashboard look like?

3. Operational Transparency

  • What is the model’s level of openness and connectivity?
  • What is the workflow to connect clients with the internal operating model?
  • How does the CFT handle oversight processes?
  • Does it offer exception-based reporting?
  • Does the CFT have advance warnings that can be monitored and communicated in the event of exceptions or delays?

4. Efficiency

  • How scalable or expandable are the teams and platforms?
  • Would the addition of a new fund mean hiring more staff or investing in additional technology capabilities?
  • How reliable are the risk management capabilities and what do they entail?

5. Risk-reduction and regulatory compliance

  • What is the risk culture? Is it proactive, reactive or sub-optimal?
  • What is the transparency level and is there is an effective learning and improvement process?
  • Is there a dedicated function for leading risk reduction and regulatory compliance?
  • How much engagement and familiarity is there with industry trends and regulators?
  • What technology updates or investments will be necessary over time?

Finding the right partner can substantially benefit funds, bringing speed, transparency, advanced analytics and risk reduction. Equally important, it can provide a high degree of personalisation that will dramatically enhance the client experience.

Overall, managers should have high expectations. They should look for the capabilities outlined above but also expect that the partner will bring creative and strategic thinking to their fund. In a fast-changing world, it’s important to partner with a provider who can stay ahead of trends and developments and provide leadership on using CFT as a strong differentiator.

By Paddy Kirwan

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A flurry of real estate projects across the Asia-Pacific region has sparked a surge in interest from a variety of investors for private equity real estate funds.

Frustrated by years of low volatility in equities markets and barrel-scraping yields in many fixed-income assets across Europe and North America, traditional asset managers, pension funds and sovereign wealth funds, among other institutions, have been exploring the Asia-Pacific region (APAC) for opportunities to boost returns.

Investors have been increasing allocations to closed-end private equity real estate funds that target properties in Japan and Australia, Ho Chi Minh City, Singapore and China. Investors in the region have mostly favoured the office sector, but also expect investments in industrial and logistics spaces to perform well.

After they settle on a market and a sector, though, investment managers are increasingly looking for fund administrators that can provide end-to-end services for the region, ranging from accounting to financing. Leveraging the right investment strategy and fund service provider, such as an administrator, can help enhance investment opportunities in the most promising market segments of a burgeoning region.

A region of different cycles

Industry watchers have been heralding the coming peak of real estate market cycles across the globe for several years. But real estate in the APAC region continues to generate solid returns roughly a decade after the Global Financial Crisis, according to a PwC and Urban Land Institute (ULI) study. Across markets and sectors, total returns in APAC were expected to reach 8.7 per cent last year, according to M&G Investment Management.

Investors are monitoring closely how the region’s diversity plays into their calculus for investing in markets and sectors that are crossing different points in their respective cycles. Broadly, the region’s economies continue to grow. Investors disagree, though, as to how much longer that will be the case and how APAC’s significant endogenous and exogenous risks will affect real estate.

Among risks, the coronavirus leads most conversations today. Although Covid-19 infections continue to spread, hampering growth across the region and spooking investors, particularly in equities, many economists predict the virus will have a limited impact on investments with longer time-horizons. The coronavirus doesn’t present a direct threat to Asian real estate markets, but its full impact on real estate investments is more difficult to predict at this early stage.

Investors are also watching real estate values closely to determine whether prices are cresting in specific markets or sectors. They’re concerned about the mixed levels of regulatory and legal protections throughout APAC countries, as well as how much US-China trade tensions are slowing economic growth and capital flows, more generally. Their most germane fears, though, concern market overcrowding, which makes deals more expensive and harder to source.

Finding the deals

Despite the litany of risks across Asia-Pacific, private equity firms that raise capital in a fund to buy and develop, improve or operate properties and then sell them to generate higher returns mostly remain determined to put capital to work in the region. Still, private equity real estate fundraising and deal flow fell in 2019, according to the latest McKinsey report on private markets.

But last year’s declines haven’t erased the recent growth the region has seen. Private market fundraising in Asia – of which private equity real estate represents a significant portion – grew at an average of 7 per cent annually between 2013 and 2018.

In particular, pension fund allocations to private markets – which include real estate, private equity, venture capital, private debt and infrastructure have leapt to 23 per cent from 6 per cent since 1999, according to a Willis Towers Watson Thinking Ahead Institute study.

Private equity real estate investors in closed-end funds have attracted large asset managers, such as BlackRock and Aberdeen Asset Management, as well as Malaysian sovereign wealth funds. They’ve been looking at logistics space in Japan; office and logistics in Australia; luxury housing and office in Singapore; and affordable and mid-market housing in Ho Chi Minh City. These investors also are calculating that U.S.-China trade war-induced slumps in Chinese markets could present buying opportunities, according to PwC and ULI.

The right products and services

The largest investment funds with APAC operations also benefit from administrators who offer general and limited partners a multitude of services and financing options, and who know the landscape, to help boost returns. Funds are looking for administrators in the region who can provide subscription lines of credit, as well as fund, bridge, deal and acquisition financing.

Many funds also benefit from administrators who offer comprehensive technology solutions and end-to-end services. These can include such GP management services as quarterly, cash flow and regulatory reporting; statutory record and upkeep; fee calculations; as well as banking and custody. LP services include Common Reporting Standard/Foreign Account Tax Compliance Act reporting; depositary services; investor AML/KYC, reporting and communications; carried interest calculations; call and distribution processing; performance monitoring; and consolidations.

Closed-end funds want administrators to provide private equity-focused accounting/general ledger software and look-through reporting for real estate. They’re also looking to use fee calculation and modelling tools that reduce manual work and computation.

Longtime APAC-based administrators can also help funds by understanding local regulations, regional fund structures and offshore fund service requirements, among other relevant region-specific information. They can place new information in the right context more rapidly and integrate it into investing strategies more efficiently.

Despite late-cycle uncertainties, opportunities abound for private equity real estate funds in APAC for those willing to research the region’s idiosyncratic risks and unearth its shifting market and sector gems. The right fund administrator, bringing expertise in the region and wide-ranging capabilities for servicing closed-end funds locally, can also boost these investors’ APAC strategies.