Michael Von Bevern and Harvey Tian recently participated in a Q&A session for the September 2024 edition of the Private Debt Investors report. The article provides valuable insights into how the rapid growth of private debt is challenging loan administration teams.
As the private credit space has grown, so has the complexity of these structures as firms continually innovate to corner the market and secure business. This complexity creates new administration challenges requiring novel and bespoke solutions from service providers. To find out more, we sat down with Michael Von Bevern, managing director for the Americas for Suntera Fund Services (formerly Socium Fund Services), and its head of loan administration and agency services, Harvey Tian.
Q: How have private debt funds become increasingly complex?
Michael Von Bevern: All funds are becoming more complex, not less. Fund structures require specialisation. For instance, facilitating distributions in a closed-end private credit fund before the fund is closed to new investors is tricky. Facilitating nuances, such as distribution classes or other features to enhance attractiveness to other investors, can be challenged in a closed-end vehicle. Funds are not as straightforward as they were a few years ago. LPs require more customisation.
Harvey Tian: Recently, we have also seen a significant increase in PIK deals. Traditionally, with a PIK, if the borrower doesn’t want to pay cash, they capitalise the PIK interest on their loan balance. We have found that a lot of lenders are doing synthetic PIK deals. Instead of paying cash for this interest, they are using additional loans to make these payments. Operationally, if a deal pays an interest payment regularly, we collect payment from a borrower and send it to a lender. For synthetic PIK deals, we have to process borrowing activity at the same time. Operationally, this can create multiple loan transactions just to shift funds from one place to another.
Q: To what extent could rate cuts in the second half of 2024 be a consideration for the administration and operation of these private debt funds?
HT: Following the recent non-farm payroll numbers, a rate cut is nearly guaranteed this year, which could create a wave of refinancing in the market. Borrowers will try to access new deals when they can. When there is a rate cut, the margin and the spread tend to go up. Any floating-rate loans that closed after covid or around that time will probably have a low margin. However, fixed-rate loans will probably try to refinance at a lower rate.
Q: What challenges is greater complexity creating for loan administration?
HT: We are seeing a greater volume of loan transactions. Historically, loan agency and fund administration teams have not communicated well with one another. This lack of synergy can lead to miscommunication, which in turn can create costly delays and potentially affect the overall efficiency and effectiveness of the fund administration process.
MVB: Our loan administration service offering primarily focuses on private bilateral senior secured debt between a fund – or multiple funds – and the portfolio company. From our standpoint, administering that means complexities such as the need for the data from these GPs. Harvey and his team become the clients’ middle office team. The loan administration and fund administration are one team. Suppose you think about everything that can make it complex, such as multiple systems or lack of systems, data management, and an ability to read and understand loan documents. In that case, we have worked hard to minimise that. Our clients operate in the mid-market; they don’t have the resources that the biggest firms have. They rely heavily on what we do. We’re trying to give them a minimalist degree of separation when it comes to us and them.
| “Funds are not as straightforward as they were a few years ago. LPs require more customisation” MICHAEL VON BEVERN |
Q: To what extent are bespoke fund service solutions preferable when it comes to increasingly complex private debt funds?
MVB: Whenever we have a prospect, I go in from the accounting and reporting perspective and look at the structure to make sure we can do it. Harvey will look at this from the loan side – can we handle the loans, the timelines, the reporting, etc? We then come together and assess if we can create a tailored solution that meets the unique needs and requirements of that client. Fortunately, we have much influence with our software provider. Most of the customisation our software provider has created has been based on Harvey’s recommendations, and he has an uncanny knack for knowing what things should look like for the borrower. Having that seamless integration with the fund accounting team helps. Remember, with the size of our clients, our fund accounting team and the loan team could be talking to the same person. We want to make sure everything is preserved in translation.
Both our systems are very customisable. We have yet to see a fund we cannot do in our nine years. We are unique – I don’t think anyone who does mid-market fund administration, loan administration and loan agency is really out there. There are big guys, but very few focus on the under $3 billion in assets under management space.
Q: In terms of private debt fund administration, what is your outlook over the next 12-18 months?
MVB: Private credit has the potential to be a massive industry shortly, and there will always be a place for credit solutions. The asset class makes a lot of sense to portfolio companies that want to expand their capital base without diluting control. Putting in senior secured, or even mezzanine, loans will remain viable.
HT: It helps that the market has become much more structured. The Loan Syndications and Trading Association (LSTA) is operationally trying to normalise this space. The more standardised it becomes, the easier it will be for investment teams to choose between debt versus equity. We’re working with the LSTA on their efforts to standardise how a loan operates in the operational sense. This means all teams will be able to co-ordinate better and more efficiently for the loans they operate.
MVB: The reality is that very few people are focused on private credit. One of the complexities as the industry evolves is being able to find people like us who are willing to keep up with change. As Harvey mentioned, we are working with the LSTA to create standard practices and procedures. Creating things like a standard subscription document, for example, is essential. Standardisation will come, but firms will need people who can accommodate bespoke things until that time.
The article was featured in the September edition of the Private Debt Investor US Report on pages 30 and 31.
For further details on this topic, please contact Michael or Harvey using the information provided below or visit our fund services overview page to learn more about Suntera Fund Services.
Key Contact:
Michael Von Bevern
CO-MANAGING DIRECTOR, AMERICAS
View Bio | Email Michael | LinkedIn
Harvey Tian
HEAD OF LOAN AGENCY & ADMINISTRATION - AMERICAS
