Non-Bank Financial Institutions: Market Perspectives

10 Apr 2017

Demica News


The recent economic downturn and negative interest rate cycles have generated disruptive changes in both bank lending and capital markets while also significantly increasing the challenges for investors to achieve adequate returns.

This new financial landscape, a consequence of the global financial crisis and progressive tightening of regulations, also changed the attitude of investors and bank lenders towards risk. Prime borrowers were privileged in funding allocation, while non-investment grade companies were left alone to face the credit crunch. This boosted the demand for alternative solutions to fill the gaps left by banks.

A larger variety of liquid and specialised institutions stepped in to explore new business opportunities.  Large institutional investors (such as life insurance companies and pension funds) have enough cash available, along with a long-term liability profile to match long-term assets, and the urgency to find higher returns. For example, to fulfil their obligations towards policyholders, long term guaranteed yields, easily affordable when insurance policies were originated, became hard to sustain in presence of a global stagnation.

While large institutional investors are the most appropriate institutions to fund large capital intensive deals, alternative lenders (typically hedge funds, credit funds, large family offices) have become particularly active in providing rapid solutions to smaller, specialised situations thanks to their quick capital sourcing capacity and ability to fund mezzanine and unitranche deals with positive results in terms of borrowers’ funding flexibility.

A recent PwC research reported the alternative investments marketplace will hit $18.1 trillion by 2020 (12.5% CAGR vs. $10 trillion in 2015) with growth driven by changes in both the investments (new liquid instruments and hedge funds ETF lowered the entry barriers to investors traditionally outside their targets) and the investors, where wealth held by mass affluent (those with $100k - $1m liquid assets) is expected to grow 50% faster than the one of HNWI (those with more than $1m).

Private equity and hedge funds are expected to remain the largest category through 2020 with $10 trillion in assets. However, several smaller subcategories (liquid alternatives, commodities, and institutional loans) will grow at a faster rate following the growth in private equity funds and business development companies. Both operate in the mid-market lending space proposing alternative financing structures to meet Europe’s overall funding gap as a result of new banking regulations.

Geographically, alternative financing is expected to remain predominantly based in North America and Europe, areas representing a combined $11.7 trillion of a total $18.1 trillion in assets in 2020. However, in other regions such as Asia and Latin America alternative assets are expected to grow at a faster pace (14.1% vs 8.4% CAGR).

This analysis reveals a bright outlook for non-banking investment industry, with new entrants and countries requiring high-level services, transparency, time, and resources to deliver efficiently.

This trend represents a huge opportunity for both investors and corporates to achieve the desired returns and match the funding targets, but the business complexity requires an increased attention to risk management procedures and adequate analytic tools to enhance supporting technology and operations.

Technological platforms that are able to manage automated and flexible processes, generating real-time reporting from large volumes of data, are key to define portfolio strategies and evaluate portfolio performances of multi-asset classes or multi-countries structured finance transactions. Asset managers need these powerful tools to drill into performance analyses and allocation strategies both by cluster and at very granular level, with the possibility to generate flexible and customised reports.

At Demica we continuously strive to be at the forefront in providing our clients with cutting-edge technologies and the most innovative working capital solutions structures to make all this happen (in a €170m facility for a major NIG logistic company, we managed to reduce client cost of funding of 300+ bps and improved the advance rate by 13% through a specific “packing algorithm” vs initial data cut).

Author: Giovanni Lazzeri