Middle-market direct lending: Obstacles and opportunities

June 05, 2020

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.

 

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 prioritize customizable 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 wire postings and financial statement preparation during high volume periods.

“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 federal reference numbers for wires, holdings and compliance test information. A fully customized 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 standardized 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.

 

Learn more about the comprehensive trustee, custody, administration and agency services we offer to middle-market lenders.

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