Contributed thought leadership by Ocorian

Ocorian's Global Head of Capital Markets Alan Booth draws on the firm’s global survey of capital markets decision-makers to shed light on why a staggering 87% of firms surveyed have a direct lending strategy in place. He also explains how these firms can overcome operational challenges by optimising their approach to administration.

Our research found that the majority (57%) of capital market investors have an existing direct lending strategy, which they are looking to expand, while 30% have a strategy that they are in the process of executing (SCI 1 June). These findings add substance to the narrative of banks being supplanted by alternative lenders as funders for midsized businesses. For example, going into 2021, non-bank lenders had a 74% market share of the European mid-market direct lending space.

As government subsidies and support schemes are withdrawn, banks - constrained by regulation, commercial appetite and their focus on sustaining profitability in a low interest rate environment - are unlikely to extend credit facilities to midsized businesses. This is going to leave a real need for capital and is likely to be felt most acutely in the hardest-hit sectors. The potential opportunities created by this void are an attractive proposition for private capital funds.

The right capabilities are needed to capitalise on opportunities
Private capital funds wishing to offer direct lending strategies in the distressed debt space may face several challenges. As much as they might anticipate increasing opportunities, they will require the right capabilities to capitalise on them.

For some of them, it will involve major strategic shifts that may create hurdles. For example, funds pivoting from a private equity or real estate focus towards direct lending may have challenges in adapting their infrastructure to meet their information and decision-making needs.

These constraints potentially limit the scalability of business models, resulting in sub-optimal data management and workflow processing. In turn, this would raise administration and compliance risks that might damage investor confidence.

Fund managers might be able to manage loan books that are performing well, but how will they fare if underperformance sets in? As pandemic-driven government support schemes are withdrawn, it is widely accepted that there will be a significantly higher risk of defaults. The question is then whether these fund managers have the experience of previous credit cycles to weather the potential storm?

Strategic success will rely on effective operational execution
In order to capitalise on opportunities effectively, private capital funds - particularly mid-market players with fewer resources – will need personnel with experience in direct lending through the whole credit lifecycle, so they can identify, understand and address the risks in their operational systems and processes. From managing covenants to collecting payments, the right expertise is vital in reducing risk, ensuring compliance and increasing operational efficiency.

At Ocorian, we partner with our clients to ease the administrative burden of loan agency and administration. Our team combines extensive market experience and first-class IT infrastructure to provide independent third-party facility agent services for new transactions, as well as successor facility agent services for existing transactions. To discuss how we could support your direct lending strategy, get in touch below.

Get more insight

Download Ocorian's global capital markets report, ‘Navigating CovExit: searching for value in the debt markets’, here.