Elections in France: Impact on the Market and Possible Scenarios

  |   For  |  0 Comentarios

From June 30 to July 7, France faces its early elections. The call for these general elections arises from the high degree of polarization and fragmentation in the country, as shown by the results of the European elections. According to experts, the outcome of this election could limit the French government’s ability to address its most urgent challenges, such as the rehabilitation of public finances.

Since the announcement of the dissolution of the National Assembly on June 9, the French market has experienced a notable decline compared to its European counterparts. “From June 10 to 13, the CAC 40 fell by 3.6%, compared to a 1.4% loss for the Stoxx Europe 600. In fixed income, the spread between the 10-year German bond and its French counterpart widened by almost 50%, rising from around 50 to 75 basis points. This level reflects 2017 conditions, which already included concerns related to the French presidential elections. If the spread between France and Germany surpasses this level, the comparison point would then be the eurozone crisis of 2011-2012, when there were concerns about the union’s survival. At that time, Greece was in default, and the National Front, the former name of the National Rally party, advocated for France’s exit from the common currency,” says Alexis Bienvenu, fund manager at La Financière de l’Echiquier.

However, could this retreat in French financial markets go much further? According to Bienvenu, it is impossible to know, as there are numerous political scenarios, and market surprises are uncontrollable in the short term. “The market could perfectly adapt to a situation where politics is not dictated by the stock exchanges, according to General de Gaulle’s quote. However, the Italian scenario shows that any policy of a heavily indebted state will increasingly depend on the market, despite its efforts to avoid this. Ignoring this reality means ultimately becoming even more dependent on it over time,” he comments.

According to analysts at Edmond de Rothschild AM, the spreads of French public debt with Germany could have widened by approximately 26 basis points in recent days, but a very pessimistic scenario has been ruled out for now. Additionally, spreads widened across Europe, from about 10 basis points in the strongest countries to around 20 basis points in some peripheral ones.

“Other risk assets also fell in recent days. High-yield spreads widened by 28 basis points, and European equity markets also declined, with France being the most affected country. The contrast with a buoyant Wall Street is revealing. The flight to quality supported 10-year German and US public debt, whose yields fell by 24 and 23 basis points respectively, leaving the absolute yields of French OATs virtually unchanged,” added analysts at Edmond Rothschild AM.

A Source of Reassurance

According to La Financière de l’Echiquier (LFDE), markets have already begun to reduce country-specific risk premiums. “Proof of this was the issuance of French public debt on June 20, which garnered reassuring subscription levels and issuance rates. The Paris Stock Exchange has also begun to recover part of the decline accumulated a week after the dissolution. Investors seem to see the horizon clearing gradually, although it remains uncertain,” they argue.

According to the asset manager’s analysis, the most costly measures are progressively disappearing from programs and could do so even more with the exercise of power. While electoral programs aim to seduce voters, the exercise of power may require realism and rigor to maintain it.

“The maxim borrowed by several French politicians, stating that promises only bind those who believe in them, seems not to have completely deceived financial markets. Political uncertainty is very present in France, undoubtedly, but as seen in recent elections in Mexico or India, it could automatically dissipate with a quick resolution starting July 8,” added La Financière de l’Echiquier.

And a Source of Instability

For Thomas Gillet and Brian Marly, analysts of sovereign countries and the public sector at Scope Ratings, “these elections will be crucial in determining President Macron’s ability to drive France’s fiscal agenda and reformist momentum ahead of the 2027 presidential elections.” However, they recognize that it is unclear to what extent French voters’ preferences in parliamentary elections will differ from European elections, “which typically favor protest votes with relatively low participation,” they explain.

Gilles Moëc, chief economist at AXA Investment Managers, believes that the surprise legislative elections called by the French President have affected markets beyond French borders. In his opinion, “the uncertainty about the macro-financial outcome of July 7 is high, as the fiscally extravagant programs of both the far-right and the left-wing alliance compete with the more orthodox offer of the centrist majority in power. According to the limited available polls, the most likely scenario is a divided Parliament. France has much more capacity than the United States to avoid government shutdowns. However, a suitable majority is needed to implement the significant discretionary fiscal correction measures implied by the current French Stability Program.”

Moëc considers a thorny issue to be the role of the European Central Bank (ECB) if pressure on French and possibly peripheral bond markets increases. “At this time, given the absolute level of yields, there is no need for the ECB to intervene, but further widening cannot be ruled out in case of complete fiscal paralysis in Paris or if an administration led by the National Rally decides to adopt a very extravagant stance. The ECB’s tool to re-enter the bond market, the Transmission Protection Instrument, gives the Governing Council enormous leeway to decide whether to act, but the documentation still makes it clear that the recipient country must comply with the EU’s fiscal surveillance framework. This is where the problem could lie. Indeed, although the National Rally no longer questions the existence of the monetary union, it remains a sovereignist party, and its willingness to accept instructions from Brussels in the event of a financing crisis could be limited,” he warns.

Possible Scenarios

In the opinion of analysts at Edmond de Rothschild AM, the President is betting on the disorganization of opposition parties but has taken a significant risk and opened up a period of uncertainty. “The main hypothesis is that the National Rally (RN) only achieves a relative majority, especially after the left-wing parties managed to form a coalition, but the current momentum could still lead to an absolute majority. A Parliament without a majority cannot be ruled out: a non-partisan figure would be needed to lead a technocratic administration, as in Italy. Markets also bet that the RN will introduce significant changes to its program, especially to the most costly ideas. Again, like Georgia Meloni. The party has already indicated that this could happen: Jordan Bardella, from the RN, has said that the cancellation of the recent pension reform would be postponed to a later date to address emergencies,” they note.

Florian Spaete, fixed income strategist at Generali Investments, points out that although it is difficult to predict an outcome given France’s two-round electoral system, there are two main scenarios: “The far-right National Rally (RN) becomes the largest group but without an absolute majority in Parliament (stalemate), or the National Rally achieves an absolute majority (probably with the support of dissident center-right deputies), with Macron remaining President but having to cohabit with the new government.”

Additionally, he mentions other less likely scenarios, such as a majority left-wing coalition, which would probably have a negative impact on French assets, although this would be mitigated by the strong presence of social democrats (PS), who would likely oppose the radical left’s proposals. “Macron, and the markets, would dream of a national centrist coalition, but it is unlikely that the numbers would work, and both the Socialist Party and the Republicans would hesitate to enter such an unnatural alliance,” Spaete clarifies.

Special Purpose Vehicle (SPV): An Advantage or a Disadvantage When Investing in Private Markets?

  |   For  |  0 Comentarios

According to a survey conducted by CSC among professionals working in private markets, 29% believe that the necessary conditions are in place for an increase in investments and deals. Additionally, 46% think that the market context will improve in the next two to five years, which will lead to an increase in special purpose vehicles (SPVs), also known as special purpose entities.

The study, whose authors assert that SPVs play a fundamental role in optimizing investments in private markets, provides a geographical perspective. For instance, respondents in the Asia-Pacific region are the most cautious, with only 16% believing that market conditions will improve within a year or are already improving. This contrasts with North America and Europe, where 37% and 33%, respectively, already see improvements or expect improvements within a year.

Among other key findings of this survey is the significant role that SPVs and private debt are playing in increasing investment in private markets. Specifically, 67% of debt professionals believe that market conditions will improve in the next two to five years.

“Our study has found a much more optimistic sentiment among senior professionals in private markets after years of significant market volatility, which bodes well for the broader investment sector and the global economy. Private debt professionals were much more optimistic than their colleagues in other sectors. This supports the trend we are seeing more generally in the market, which is leaning towards private debt,” says Thijs van Ingen, Global Market Head of CSC Corporate and Legal Solutions.

CSC’s study comes at a time when private markets have begun to recover after significant volatility and headwinds in recent years. The firm notes that the use of SPVs, critical structures at the heart of the global investment system, has also grown, but so has the complexity faced by managers due to increased multi-jurisdictional regulation, stricter reporting requirements, and the need for richer levels of data granularity.

According to Delphine Jones, Managing Director of CSC Client Solutions, SPVs have become increasingly complex and involve more management work. “The SPV ecosystem has also become relatively inefficient, with a lot of unnecessary complexity. It is in this environment that outsourcing to specialized SPV administrators is also growing,” Jones comments.

This complexity has led many firms investing in private markets to opt for outsourcing part of the management of these special vehicles. In this regard, the CSC survey shows that the main criterion for outsourcing is “finding a good administrator,” according to 66% of respondents. Other criteria mentioned, in order of relevance, include finding a reputable administrator, technology and data and reporting capabilities, and access to a sophisticated technology platform. Additionally, respondents involved in real assets like private equity and debt indicated that they would like technology to provide a centralized portal for a single view of all SPVs (57% and 59% respectively).

“Many cited technology as an important factor when selecting their SPV administrator, highlighting the importance of technology in SPV management. This includes optimizing deal sourcing, investment, helping portfolio performance, and many other areas. Regardless of the strategy, fund managers aim to have a technology-enabled approach and seek to achieve an all-in-one administrative solution as much as possible. While it may seem advantageous to use multiple outsourcing partners, having too many partners can actually make processes even more complex. Consolidating their SPV administration to a single global outsourcing partner helps to optimize their processes,” concludes Thijs van Ingen.

Invesco Launches a New ETF Focused on China’s Most Innovative Companies

  |   For  |  0 Comentarios

Invesco has announced the launch of Europe’s first ETF providing investors with specific access to the ChiNext 50 Index, composed of the largest and most liquid companies in China’s technology and other innovative sectors. According to the asset manager, the Invesco ChiNext 50 UCITS ETF will replicate a capped version of the index to reduce concentration risk and ensure sufficient diversification.

Following this announcement, Gary Buxton, Head of EMEA ETFs at Invesco, highlighted one of the advantages of their global business model is having a strong local presence in the world’s major financial centers. “In collaboration with Invesco Great Wall, our joint venture investment management company in mainland China and a leading specialist in the Chinese market, we are pleased to announce, together with the Shenzhen Stock Exchange, the launch of a UCITS ETF linked to the ChiNext 50 Index. Our new ETF provides investors with unique access to China’s long-term growth potential, particularly given its focus on the innovation-driven transition to a new economy. As the ChiNext 50 Index celebrates its tenth anniversary in June, this ETF also marks a milestone in the index’s overseas expansion, accelerating the internationalization of Chinese A-shares,” Buxton added.

The asset manager believes that China is one of the fastest-growing markets in the world, with steady progress in key areas of economic growth, including technology. The country’s current five-year plan includes a goal to increase research and development (R&D) spending by at least 7% per year from 2021 to 2025, focusing on areas expected to yield high-value patents. For equity investors, increased R&D spending can be a significant driver of corporate earnings growth.

The ChiNext 50 Index reflects the performance of 50 of the largest and most liquid companies listed on the ChiNext market of the Shenzhen Stock Exchange. The capped index replicated by Invesco’s ETF comprises the same securities as the parent index but applies limits such that, at each quarterly rebalance, no individual security can have a weighting greater than 8%, and the aggregate weighting of securities with weightings above 4.5% cannot exceed 38%.

“While the index is not subject to explicit sector restrictions or requirements, investors can logically expect an overweight in technology, industry, and healthcare. The fund will invest in companies from rapidly growing innovative segments such as artificial intelligence, electric vehicles, renewable energy, robotics, automation, and biotechnology. Compared to broader Chinese indices, the average company in the ChiNext 50 Index has used more than double its operating income over the past six years for R&D financing to drive innovation,” highlighted Laure Peyranne, Head of ETFs Iberia, LatAm & US Offshore at Invesco.

The ETF will employ a replication method that aims to hold, as far as possible and feasible, all the securities in the index in their respective weightings but will use sampling techniques in circumstances where this is not reasonably possible.

Ignacio Gutiérrez-Orrantia, New CEO of Citibank Europe

  |   For  |  0 Comentarios

Citi has appointed Ignacio Gutiérrez-Orrantia as Chief Executive Officer of Citibank Europe Plc. (CEP). Based in Dublin, Ireland, Citibank Europe Plc. is one of Citi’s largest legal entities and its primary banking subsidiary in Europe. As explained by the entity, Gutiérrez-Orrantia assumes this role in addition to his current position as Head of Cluster and Banking in Europe, a role he has held since November 2023.

As Head of Cluster and Banking in Europe, Gutiérrez-Orrantia is responsible for managing Citi’s client relationships across Europe, overseeing all businesses, and maintaining a strong risk and control environment. As CEO of CEP, a vital part of his role will be to lead Citi’s European banking subsidiary and foster strong relationships with European regulators.

Gutiérrez-Orrantia has also been appointed Vice Chairman and member of the Supervisory Board of Bank Handlowy w Warszawie S.A. (Citi Handlowy) (MC: 3.43 billion USD). Additionally, Natalia Bozek, CFO of CEP and Europe, and Fabio Lisanti, Head of Markets in Europe, have been appointed to the Supervisory Board of Citi Handlowy. Citi Handlowy, a subsidiary of CEP, is one of Poland’s largest financial institutions.

Gutiérrez-Orrantia has over 30 years of experience in financial services. He has been with Citi for 20 years and was recently co-head of Citi’s Banking, Capital Markets, and Advisory business in Europe, the Middle East, and Africa (EMEA), where he led a team of more than 2,000 bankers across 54 markets. During this time, he has led some of Citi’s largest investment banking transactions in the UK and EMEA.

Following this announcement, Ernesto Torres Cantú, Head of International at Citi, stated: “The appointment of Nacho as CEO of Citibank Europe plc, in addition to his responsibility as Head of Cluster and Banking in Europe, combines the growth of our client business in Europe with the responsibility of having industry-leading risk and control, and managing our European legal entities. Nacho’s leadership in these critical areas of our business will support our simplification plans and ensure his accountability for all our activities in Europe. He is an exceptional banker, highly respected for the advice and insights he provides to clients. His experience, combined with the strength of Citi’s global network and services, ensures that we are well-positioned to build on the positive momentum we are achieving in Europe.”

For his part, Nacho Gutiérrez-Orrantia added: “I am delighted to be appointed CEO of Citibank Europe plc. We have exceptional talent here and employ nearly 18,000 people. Citi has a great opportunity to deliver our unparalleled global network to our European and global clients. I am confident that we will be the leading international bank in Europe.” Citi has had a presence in Europe for over 100 years and operates in 24 countries in Europe, serving clients in 18 more.

Morningstar Data Shows Renewed Interest in Risk: Record Inflows Into Equities and Notable Outflows From Money Market Funds

  |   For  |  0 Comentarios

According to the latest data collected by Morningstar, in May, investors showed a positive sentiment, possibly driven by hopes of interest rate cuts and positive macroeconomic data on economic growth, investing 54 billion euros in funds domiciled in Europe. In terms of flows, this figure makes May the best month so far in 2024.

Among the trends observed in May, global equities strongly recovered from the previous month’s losses, with developed markets outperforming emerging markets overall. “Investors continued to anticipate interest rate cuts, despite the US Federal Reserve keeping interest rates unchanged once again in May, with Chairman Jerome Powell indicating that easing was postponed but not canceled. In fact, the decline in US inflation has stalled in recent months, highlighting that the final stretch towards 2% inflation will be difficult for the Fed. Conversely, in Europe, a more moderate narrative emerged, with the market anticipating the European Central Bank meeting in June where a rate cut was widely expected, though the path beyond this remains less clear,” Morningstar explains in its report.

Notably, long-term index funds recorded inflows of 33.1 billion euros in May, compared to the 20.8 billion euros gained by actively managed funds. According to Morningstar, last month, none of the broad global category groups experienced outflows from either passive or active strategies. “The market share of long-term index funds increased to 28.25% in May 2024 from 24.93% in May 2023. Including money market funds, which are dominated by active managers, the market share of index funds stood at 24.57%, compared to 21.78% 12 months earlier,” they indicate.

Regarding the major players, the data shows that global large-cap blend equity funds were by far the best-selling in May, with Mercer Passive Global Equity CCF raising 1.4 billion euros in new net funds during the month. “Global large-cap growth equity funds and US large-cap blend equity funds followed at some distance,” they add.

In the case of passive management, BlackRock’s ETF provider, iShares, topped the list of asset gatherers last month, with net inflows of 8.4 billion euros in May. The iShares Core S&P 500 ETF was the best-seller, attracting 1 billion euros. Capital Group and J.P. Morgan secured the second and third largest inflows in May, with 6 billion euros and 4.6 billion euros, respectively.

Analysis of Flows

In this context, it is noted that investors showed a very positive sentiment towards equities in May, with equity funds receiving 30 billion euros, the best monthly result in terms of flows since January 2022. “Passive strategies took the majority, with 20.3 billion euros in net inflows during the month. Nonetheless, active equity funds managed to capture 9.7 billion euros, ending a 14-month period of net monthly outflows. Global large-cap equity funds were by far the most sought-after products last month,” they highlight.

Regarding bond funds, they received 30.2 billion euros in May, the eighteenth month of positive flows in the last 19 months. It is noteworthy that both passive and active strategies shared the benefits, with net inflows of 12 billion euros and 18.3 billion euros, respectively. In this regard, the Morningstar report clarifies: the fixed-term bond category was the best-seller in May, followed by very short-term euro bond funds.

In contrast, May data shows that allocation and alternative strategies continued losing assets with net outflows of 4.1 billion euros and 1.2 billion euros, respectively, in May. “Allocation strategies have had only one positive month in terms of flows since December 2022. Meanwhile, alternative funds have experienced net outflows every month since June 2022,” they explain. On the other hand, commodity funds had net inflows of 515 million euros and, finally, money market funds lost 3.7 billion euros last month, “confirming a renewed appetite for risk,” they highlight.

Sustainable Investment

Lastly, the report notes that funds within the scope of Article 8 of the Sustainable Finance Disclosure Regulation had net inflows of 18.7 billion euros in May, the best monthly result since December 2022. “Global large-cap blend equity funds were the main driver, as well as global small- and mid-cap equity products,” it points out. At the same time, funds falling under Article 9 lost 617 million euros in the month.

As Morningstar explains, from an organic growth perspective, Article 8 funds showed an organic growth rate of 0.73% so far this year. On the other hand, products in the Article 9 group had a negative organic growth rate of 2.40% in the same period. Between January and May, funds not considered Article 8 or Article 9 under the SFDR had average organic growth rates ranging from 0.13% to 2.69%.

DWS Appoints Ulrich von Creytz as Head of Real Estate for Europe

  |   For  |  0 Comentarios

DWS has announced the appointment of Ulrich von Creytz as Head of Real Estate for Europe. Based in Frankfurt, von Creytz will report to Clemens Schaefer, Global Head of Real Estate, APAC, and Europe.

In his new role, Ulrich will leverage his extensive experience in client relations and deep knowledge of the European real estate sector, acquired over 20 years, to enhance the platform’s investment process, both in terms of client guidance and capital orientation. Supported by DWS’s thematic investment approach, he will drive the entity’s market positioning and strategy in the real estate segment, working closely with the European platform strategy, portfolio management, and transactions teams.

Ulrich joined the company in 2004 and has held several senior positions in the real estate sector. Most recently, he served as Head of Real Estate Specialists for EMEA, overseeing teams in Frankfurt and London. He has played a key role in growing client relationships, demonstrating his ability to align investment themes and product offerings with clients’ strategic investment goals. Additionally, as a board member for nearly a decade, Ulrich has been actively involved in investment decisions for two legal entities, in line with the strategy and within the parameters of DWS’s fiduciary duties to deliver the best results and performance for investors.

He will join DWS’s European Investment Committee and will retain his two board positions in Germany. Clemens Schaefer, Global Head of Real Estate, APAC, and Europe, stated, “I am confident that Ulrich’s extensive experience and strategic capability will have a positive impact on the investment process, aligning investment themes and sources of capital.” He added, “His strong relationships built through the platform, industry, and our investor base will play a crucial role in shaping the future growth of DWS’s European real estate platform.”

In the words of Ulrich von Creytz, the new Head of Real Estate for Europe, “This position is a great honor given DWS’s long-standing track record as a leading real estate investment manager in Europe. I am looking forward to defining an investment agenda focused on value creation and growth, aligned with our clients’ aspirations.” He added, “We are starting to see some attractive opportunities in European real estate markets. This is driven by a window of opportunity for investors willing to enter the market in the next 2 to 3 years, which we believe could benefit from the expected strong recovery.”

Ulrich holds a Law degree from the University of Freiburg, a Law degree from the Higher Regional Court of Berlin, a PhD in Constitutional Law from the University of Freiburg, and a Real Estate Specialist degree from the European Business School.

Amundi Adjusts the Management Fees for a Wide Selection of Its ETF Range

  |   For  |  0 Comentarios

Amundi is committed to making its range of ETFs more competitive. The asset manager has announced that it has been adjusting management fees across a wide selection of its passive funds. According to Amundi, this move demonstrates its commitment to “offering investors industry-leading products that combine performance, diversification, and cost efficiency.”

Amundi’s position as a key player in the market allows cost efficiencies to be passed on to investors. They indicate that the fee reductions will apply to key exposures such as traditional and ESG U.S. equities, euro equities, U.S. government debt, and euro credit. This initiative aligns with Amundi’s goal of making diversified investment accessible to all types of investors.

Amundi ETF offers more than 300 ETFs covering various asset classes, geographies, sectors, and themes, enabling investors to find solutions tailored to their specific investment needs and objectives in a competitive manner.

“One of Amundi’s long-term commitments is to ensure that our clients benefit from our adaptability and innovation across our extensive range of ETFs, as well as from our economies of scale. We value the importance of cost efficiency in investment, and these reductions will help investors achieve their investment goals without compromising on quality. By reducing the fees on such a diverse range of ETFs, we are making it easier for investors to benefit from our extensive range of products,” explains Benoit Sorel, Global Head of Amundi ETF, Indexing & Smart Beta.

How to Use Securitization As a Key Tool for Distribution?

  |   For  |  0 Comentarios

Denys Nevozhai - Unsplash

Asset securitization has had a significant impact on portfolio management and distribution, providing asset managers with an additional tool to diversify, optimize performance, and manage risk more effectively. This article by the fund manager FlexFunds explores how portfolio managers can use asset securitization to enhance the distribution of investment strategies, examining its benefits, challenges, and impact on capital markets:

Asset securitization

Asset securitization is nothing more than the process of transforming any type of financial asset into a listed security. Through this financial technique, exchange-traded products (ETPs) are created, acting as investment vehicles aimed at giving the underlying assets greater liquidity, flexibility, and reach.

FlexFunds, a leading company in the set up and issuance of investment vehicles (ETPs), defines asset securitization as a tool used by asset managers as a bridge to facilitate access to investors and foster capital raising for various investment strategies.

Among the main benefits that securitization offers to portfolio managers are:

1.- Increased liquidity: The securitization process of any asset results in a product listed on the stock exchange with an individual identifier (ISIN) that can be bought and sold through Euroclear and Clearstream, making it possible to hold it in an existing brokerage account.

2.- Risk diversification: By distributing the risks associated with the underlying assets among multiple investors, securitization helps reduce exposure to risk for any individual investor. This is especially important during times of market volatility.

3.- Access to international capital: Securitization facilitates access to international capital markets, allowing companies to attract investment from a global investor base.

4.- Centralized account management: Securitization can offer the advantages of centralized account management. It avoids the administrative redundancies of separately managed accounts and allows investors to access higher-ticket projects that they would not have been able to access otherwise.

5.- Protection of assets under the structure: Because the issuance is executed through a special purpose vehicle (SPV), the underlying asset is isolated from the credit risk that may affect the manager, and thus, the investor.

In general terms, asset securitization is a process that allows multiple classes of assets, liquid or illiquid, to be converted into listed securities. Additionally, it offers the inherent capacity of exchange-traded products (ETPs) to transform assets into “bankable assets,” understood as assets that acquire the capacity to be distributable on various private banking platforms, according to the specialized opinion of FlexFunds.

 How can asset securitization help distribute your investment strategy?

Asset securitization plays a crucial role in the distribution of investment strategies internationally. Here are some ways this process can enhance these strategies:

  • Flexibility in strategy management: Securitization allows asset managers to access a broader range of assets that they might not otherwise have access to. This includes assets from emerging markets or specialized sectors that may offer higher returns but carry higher risks.
  • Facilitates complex investment structures: Through securitization, asset managers can structure more complex investment products, such as collateralized debt obligations (CDOs) or mortgage-backed securities (MBS), which attract different types of investors with different risk profiles.
  • Efficiency in distribution: Securitization facilitates the distribution of investment products in different jurisdictions, leveraging the infrastructure of international capital markets. This allows asset managers to reach a broader and more diverse investor audience.
  • Transparency and international standards: Securitization requires compliance with international regulatory and transparency standards, increasing investor confidence and facilitating the distribution of products in multiple markets.

 Challenges of securitization

Despite its numerous benefits, asset securitization also presents several challenges that must be managed carefully:

  1. Opacity risk: While securitization can disperse risk, it can also introduce complexities that make the products less transparent.
  2. Regulation and compliance: The regulatory requirements for securitization can be complex and vary between different jurisdictions. Managers must ensure compliance with all applicable regulations, which can increase the costs and time needed to structure and issue securitized products.
  3. Market risk: Although securitization disperses risk, the underlying assets are still subject to market risks. A deterioration in the quality of the underlying assets can negatively affect the performance of securitized securities.

The future of securitization in international capital markets

As capital markets continue to evolve, asset securitization will remain a vital tool for distributing investment strategies.

Regulations will keep changing: the securitization market has been subject to increased regulatory scrutiny in recent years, and this trend is expected to persist. As regulators gain a better understanding of the risks associated with securitization, they are likely to introduce new rules and guidelines to ensure the market remains stable and transparent.

Moreover, the growing demand for sustainable investments is driving the development of securitized products that incorporate environmental, social, and governance (ESG) criteria. Asset managers are exploring the securitization of green assets, such as renewable energy projects, to attract investors seeking to generate a positive impact along with financial returns.

In summary, asset securitization is a powerful tool that can enhance the distribution of investment strategies in international capital markets. By transforming any type of asset into listed securities, securitization improves liquidity, diversifies risk, and facilitates access to global capital. However, it is crucial to carefully manage the associated challenges, including transparency, regulation, and costs.

If you want to know how asset securitization can enhance your investment strategy and facilitate capital raising in international markets, contact the specialists at FlexFunds at contact@flexfunds.com

Private Credit I: Origins, Classification, Characteristics, and Risks

  |   For  |  0 Comentarios

Private credit has emerged as a popular asset class over the past decade, especially among sophisticated investors seeking diversification and attractive returns outside traditional public markets. In the following lines, we analyze this asset class from its inception, considering both the opportunities and the risks that must be carefully assessed.

Origins of Private Credit

The birth of private credit is closely tied to the banking sector in the United States. As shown in the following chart, from the end of World War II until the 1980s, the number of banks in the United States ranged between 13,000 and 15,000. Following the financial crisis known as the Savings & Loans Crisis, the number of banks gradually decreased to 8,000. Later, due to the Great Financial Crisis, a second wave of consolidations reduced the number of banks to the current 4,000. Not only did the number of banks decrease, but the size of the surviving banks grew significantly, leaving a large gap in the segment of medium-sized banks that, in turn, served the middle market segment. This market went from having thousands of banks offering medium-sized loans to not having enough banks to request loans from, particularly during crisis periods.

This gap in the mid-small financial segment was filled by non-banking financial companies such as GE Capital or CIT and what is known as Business Development Companies (BDCs). BDCs can be public companies, listed on stock exchanges and registered with the SEC, through which investors, by purchasing their shares, provide the capital that is lent to medium and small companies. They can also be established as private companies or funds.

Classification of Private Credit

There are different ways to classify private credit into subcategories, each with its own characteristics and risk-return profiles. These categories include:

1. Direct Lending: Loans to medium-sized companies that do not have access to public capital markets. Direct loans are often collateralized and have strict covenants that provide additional protections for lenders.
2. Special Situations: Non-traditional lending scenarios where companies seek financing due to extraordinary circumstances or specific needs that are often complex and require customized solutions.
3. Mezzanine Debt: This type of debt is positioned between senior debt and equity in a company’s capital structure. It offers higher returns than senior debt but carries higher risk due to its subordination.
4. Distressed Debt: Investments in the debt of financially troubled companies. Distressed debt investors seek to benefit from the restructuring of these companies.
5. Asset-Based Financing: Includes loans secured by specific assets, such as real estate or inventory, providing an additional level of security for lenders.

The following chart shows the main subcategories of private credit compared to traditional liquid fixed income and bank debt markets.

Relationship Between Private Equity and Private Credit – Sponsored Transactions

Often, transactions in the direct lending subcategory occur when a private equity (PE) fund wishes to acquire part or all of a company’s equity. The PE fund becomes the sponsor of the transaction and invites a BDC to participate by lending money to the target company, positioning itself in the senior part of the capital structure, protected by the sponsor’s equity injection. Due to these types of sponsored transactions, a significant percentage of private credit deal flow is closely linked to PE transactions.

Characteristics of Private Credit

Attractive Returns and Diversification

Private credit offers returns generally higher than those obtainable in public bond markets. These additional returns compensate for illiquidity and, in many cases, the greater complexity of these instruments. Some of the most notable characteristics of private credit are:

1. Inflation Protection: Since many private loans have variable interest rates, they can offer effective protection against inflation. This is especially relevant in economic environments where interest rates are rising.
2. Strong Financial Covenants: Private loans often include rigorous financial covenants that allow lenders to intervene early if the borrower’s financial situation deteriorates. This can include restrictions on the borrower’s ability to incur additional debt or make dividend distributions.
3. Flexibility and Customization: Private credit allows for greater customization in loan structuring compared to public bond markets. This flexibility can include payment terms tailored to the specific needs of the borrower and lender.

Risks of Investing in Private Credit

1. Credit Risk: The most obvious risk is that the borrower may not be able to meet its payment obligations. While financial covenants can mitigate some of this risk, it remains a crucial consideration. Private loans are often made to medium-sized companies that may be more vulnerable to economic cycles.
2. Lower Liquidity: Unlike public bonds, private credit instruments are not traded on liquid secondary markets. This means investors may have difficulty selling their investments before maturity without incurring significant discounts.
3. Complexity and Administrative Costs: Structuring, managing, and monitoring investments in private credit can be complex and costly. It requires a specialized and experienced team, which can increase operational costs compared to more traditional investments.
4. Interest Rate Risk: While variable-rate loans can offer protection against inflation, they can also expose borrowers to higher interest costs in a rising rate environment, potentially affecting their ability to pay and increasing credit risk.

Final Considerations

Given the above, does it make sense to include private credit funds in client portfolios at this time? It may not be prudent to give a generic “yes” without considering the characteristics and needs of investors, but an asset class with a 20-year history, nearly $2T in assets, and consistent results having weathered the Great Financial Crisis (2007-2008) and the 2020 pandemic deserves serious consideration. Let’s review some important details:

Firstly, the fact that institutional investors maintain positions in private credit provides great stability to the asset class. American pension funds, with a very long-term investment horizon, hold private credit investments ranging between 5%-10% of assets under management. Additionally, 38% of family offices (FOs) worldwide invest in private credit, increasing to 41% if the FO is located in the United States. On average, private credit investments make up 4% of total assets, although this varies depending on the volume under management.

Secondly, it is a strategy that produces and distributes cash flows, a highly valued characteristic during market panic or volatility. Additionally, as of the end of 2023, these cash flows are 30% higher than those provided by high yield bonds, and more than 100% over treasury bills.

Thirdly, the fact that it is a largely illiquid strategy reduces portfolio volatility and correlations with other asset classes, acting as a diversifier.

Finally, it is very important to highlight that the dispersion of returns among different private credit managers is substantially wider than among public credit managers, and the persistence in the different quartiles is very pronounced. This implies that the manager selection process is the determining factor, and it invalidates the use of averages as an indicator of the asset class’s performance.

Due to its private nature, access to information about different private credit managers is limited, making evaluation difficult. At Fund@mental, we have developed expertise in private funds and offer an analysis and due diligence service.

Analysis by Gustavo Cano, Founder and CEO of Fund@mental.

Sustainable ETFs: A Polarized Global Market with Europe as the Leading Region

  |   For  |  0 Comentarios

Sustainable ETFs have experienced extraordinary growth, reaching $550 billion in assets under management by the end of 2023, according to a report published by State Street and JP Morgan AM, which outlines the key trends in the passive management industry. One of the main conclusions of this document is the significant disparity between the situation and evolution of ESG ETFs on both sides of the Atlantic.

The report explains that ESG ETFs have undergone substantial development over the past decade. The most pronounced increase occurred during the pandemic years, 2020 and 2021, when assets under management grew by $335 billion, a 275% increase compared to 2019. “The COVID-19 pandemic greatly accelerated ESG investment, highlighting the importance of addressing global challenges such as pandemics, climate change, and biodiversity loss. This period emphasized the need for a more comprehensive investment strategy that integrates traditional financial analysis with a broader consideration of a company’s social and environmental impact,” the report explains.

Europe Reigns Supreme

The growth and development of this segment of the industry have been uneven on both sides of the Atlantic. According to the report, European investors have consistently led the adoption of ESG ETFs, driven by strong legislative frameworks such as the SFDR (Sustainable Finance Disclosure Regulation) and a deeply ingrained cultural emphasis on sustainability.

As of 2023, the region maintains a dominant advantage, representing nearly three-quarters of the global ESG ETF market, with assets totaling $402 billion. While North America has slightly lagged behind Europe in the growth of ESG ETF assets, it has still maintained a strong presence, with total assets currently at $131 billion, just $10 billion less than its peak in 2021. The report indicates that this trend was supported by an increase in U.S. corporations adopting ESG standards and favorable changes in U.S. government policies, making ESG funds more attractive to retirement plans.

The Asia-Pacific region, while considerably smaller in scale compared to Europe and North America, has shown notable growth. From a modest start with $385 million in ESG ETF assets in 2014, the region expanded its portfolio to $15 billion by 2023.

According to the report’s data, from 2014 to 2023, the number of ESG ETFs globally skyrocketed from 148 to 1,826, highlighting a shift towards sustainable investment. “The EMEA region led this growth, with ESG ETFs expanding from 107 to 1,281, demonstrating a strong commitment to ESG principles. North American ESG ETFs grew from 34 to 430, reflecting an increasing interest in sustainable investment, although at a slower pace than in EMEA. The APAC region, starting from a smaller base, saw a steady increase from 7 to 115 ESG ETFs. The recent trend in ESG ETF launches, especially in North America, is quite distinctive. Despite a general slowdown in new ESG ETF introductions in 2023, the sharp decline in North America is particularly noteworthy,” the report adds.

After a period of robust growth culminating in 115 new funds in 2021, North America experienced a sharp decline to just 13 new launches in 2023. This drop starkly contrasts with the previously buoyant trend and reflects broader shifts in investment priorities.

Flows Tell the Full Story

The full stance of North American (NORAM) investors on ESG, as the study shows, is clearly illustrated through ETF flow trends, highlighting a significant move away from ESG investments in the region. “In 2020, global net flows into ESG ETFs soared to $93 billion, reaching a peak of $165 billion in 2021. During this peak, the EMEA region contributed an impressive $109 billion in net flows, representing 65% of the total, while NORAM also saw a significant increase with approximately $51 billion,” the report indicates.

However, this upward trajectory in North America changed notably in the following years. By 2023, net flows in this region not only decreased but also turned negative. The report explains that this sharply contrasts with the steady growth in EMEA, which recorded nearly $50 billion in net flows during the same period. “This shift dispels the previous assumption that North America was rapidly scaling and poised to surpass Europe in the ESG ETF space. Current trends, according to the report, point to a reevaluation of NORAM investors’ strategies towards ESG investments, particularly in the United States,” the document states.

A key conclusion is that the decline in ESG investment, particularly in the U.S. in recent years, can be attributed to several factors, with a significant one being the rise in anti-ESG legislation driven mainly by political changes. This trend began gaining momentum in 2021 and reached new levels in 2023, with over 150 anti-ESG bills and resolutions introduced in 37 states. Although many of these proposals were rejected or stalled, by December 2023, at least 40 anti-ESG laws had been passed in 18 states, according to Harvard Law School. Conservative factions have also initiated boycotts against brands they consider overly progressive, resulting in considerable opposition to such brands and the ESG initiatives they support.

Investor dissatisfaction is another important factor in the declining interest in ESG initiatives. There is a growing preference for strategies that emphasize financial returns and a profit-centric approach, leading to less focus on social causes that do not produce immediate economic benefits.

According to the report, as a result of these dynamics, companies, including ETF issuers, have started to downplay ESG discussions, leading to a decrease in the promotion of related products and a subsequent decline in net flows into ESG ETFs compared to previous years. This divergence in investment philosophy has allowed ETF issuers to introduce Anti-ESG funds, which have seen increased interest over the past year. These Anti-ESG funds emphasize a more traditional profit-focused approach, attracting investors who prioritize financial returns over broader ESG goals.

While Europe, according to the report, exhibits a less polarized approach to ESG investment and has largely set a global example in ESG adoption, the past few years have seen a slight slowdown compared to the momentum of 2020 and 2021. Despite significant investment flows in 2022 and 2023, European interest in ESG has somewhat waned due to economic uncertainties, high interest rates, inflation, and geopolitical tensions, which may have led investors to shift towards other investments.

Moreover, the underperformance of certain ESG strategies, particularly in thematic areas like renewable energy, affected by rising financing costs, material inflation, and supply chain disruptions, among other factors, has played a role in fostering this cautious sentiment. Additional concerns about greenwashing and evolving regulations, covering issues such as fund reclassification and SFDR implementation, have created uncertainty for ESG investors, potentially causing them to temporarily pause investments until greater clarity emerges.

The Active Approach

The analysis of NORAM’s negative net flows in 2023 reveals a distinctive pattern: $6.6 billion in outflows predominantly came from passive funds, while active ESG ETFs were in demand, attracting $5.3 billion in new capital. This shift indicates a growing preference for active management in ESG investment. Investors, according to the study, appear to be moving towards strategies that offer greater flexibility and alignment with their specific investment goals, diverging from the constraints often associated with passive funds. For some investors, active ESG investment could offer a more dynamic approach, allowing them to have a potentially greater social impact and more direct influence over corporate behavior through activism.

According to the report, this involves deep analysis and engagement with companies in the form of activism, although it typically carries higher fees than passive strategies. By the end of 2023, the proportion of actively managed ETFs within the total AUM of ESG ETFs in NORAM had significantly increased to 13%, compared to just 3% in 2018. This notable growth underscores a substantial shift in investor preference towards active management in the ESG space over the past five years.

In Europe, passive ESG ETFs remain the predominant choice for investors, holding a significant 94% share of total ESG ETF assets. They also maintain a dominant position in terms of annual net flows. This trend persists despite a general decline in inflows into ESG ETFs on the continent that leads in ESG.

The acronym ESG stands for environmental, social, and corporate governance, introduced by the United Nations in the 2004 document titled “Who Cares Wins.” This document marked a crucial moment, advocating for the integration of these critical factors into financial analysis and decision-making. Over the subsequent 19 years, ESG has transformed from a niche concept into a central element of corporate strategy, permeating every sector of the industry, including financial instruments like ETFs.