Middle-market direct lending: Obstacles and opportunities

Direct lending to middle-market borrowers presents a variety of challenges. Here’s how partnering with an all-in-one provider can help you overcome many of them.

Tags: Loans, Custody, Trustee, Corporate trust, Administration
Published: August 21, 2019

Direct lending is a complex asset class, featuring a growing number of unique loan structures, funding structures and transaction types. Now more than ever, direct lenders to the middle market require a flexible service offering – flexibility that, unfortunately, not many providers can accommodate.

Whether limited by their business infrastructure or an inability to scale, service providers often struggle to prioritise customisable middle-market solutions:

  • Many focus mainly on the large, syndicated bank loan industry, with middle market as an afterthought
  • Many offer only a patchy selection of unconnected services

A scarcity of options often forces middle-market managers to retain a separate fund administrator and custodian or trustee. This can create numerous issues.

Using multiple vendors – each operating with different accounting systems and timelines – complicates ongoing management and communication. It can hamper the process of producing timely, accurate quarterly or year-end financial statements. And, in situations where the direct lender is also the loan portfolio agent, notices and critical loan information are often communicated in non-standard formats. This inconsistency can delay payments and financial statement preparation during high volume periods. 

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"Today, direct lenders are demanding better solutions. More are seeking out an all-in-one partner that can provide comprehensive middle-market services with the flexibility they require."


Key elements of a full-service, middle-market service provider

As more participants enter this increasingly competitive environment, middle-market professionals need to focus on serving their clients, sourcing deal flow and managing their credit exposures. They can’t afford the roadblocks associated with inefficient, inadequate back-office operations or systems that don’t seamlessly interact. An all-in-one solution provides key resources to help overcome these issues.

Advantages of partnering with a full-service provider include:
 

  • Seamlessly integrated products and a team of experts
    The service provider should have a dedicated team of middle-market loan experts that are well versed in the unique nature of the asset class and focused on delivering top-tier client service. The combination of the trustee and custodian platform and a fund administration product and loan agency offering is essential for operational efficiency. Each service should be specifically designed with the middle market in mind and include experts with decades of experience in complicated transactions. These experts must understand the relationship of the lender and the borrower and manage the constantly changing loan terms endemic to this market.
  • Online access to account information
    It’s essential for a service provider to have a web portal that provides on-demand views into daily cash, and real-time reference numbers for payments, holdings and compliance test information. A fully customised reporting platform should feed into the portal, which can be accessed directly by the alternative investments fund administration team. This eliminates many of the inefficiencies around financial reporting periods.
  • Use of an independent accounting system

    The full-service provider’s loan agency team should use an independent accounting system to:

    • Track lender and borrower information
    • Track cash and loan attributes
    • Automatically create and deliver notices
  • It’s critical the notices are clear, concise and on time, and that they include all necessary information in the correct format. Additionally, the service provider should be willing to white-label their services. That way, the direct lender can maintain the relationship with the borrower but doesn’t need the staff or technology systems in place to generate notices or process payment and interest payments.
     

  • Alignment of goals and priorities

    A provider with comprehensive middle-market solutions understands the goals of direct lenders, which can help improve flexibility and efficiency in an ever-changing market. By selecting an all-in-one service provider:

    •  Borrower payments are more likely to be on time and accurately reflected in investor reports
    • Loan agent notices are more likely to be in standardised formats and easily digestible by optical character recognition technology
    • Fund financial statements can be turned around in a shorter time frame with fewer necessary revisions

With a reliable full-service partner, you can trust the back-office operations of your business are running smoothly and compliantly – providing you with more time to spend on expanding your business and serving your clients.

 

Elavon Financial Services DAC (trading as U.S. Bank Global Corporate Trust) Registered in Ireland with the Companies Registration Office, Reg. No. 418442. The liability of the member is limited. Registered Office: 2nd Floor, Block E, Cherrywood Science & Technology Park, Loughlinstown, Co. Dublin, Ireland. Regulated by the Central Bank of Ireland. United Kingdom branch registered in England and Wales under the number BR009373. In the U.K., Elavon Financial Services DAC, trading as U.S. Bank Global Corporate Trust, operates from offices at 125 Old Broad Street, Fifth Floor, London, EC2N 1AR and is authorised by the Central Bank of Ireland and the Prudential Regulation Authority and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct Authority, are available from us on request.