Each day, the headlines are full of stories detailing soaring inflation, rising interest rates, and geopolitical turmoil. As institutions face these headwinds of market uncertainty, they are looking to new streams of revenue and profitability. As such, many firms are expanding the array of acceptable collateral to secure private loans, including structured lending for ultra-high net worth clients, as well as trade finance for firms whose primary asset is their future production potential.
In a recent interview, I sat down to discuss SS&C Advent Syncova, a best in breed calculation engine. Syncova supports a variety of business needs including margin, LTV, and financing calculations. Increasingly, clients are coming to Syncova to understand how it can service non-traditional loans. Each of these approaches - structured lending and trade financing - can be highly lucrative, but they present some significant operational challenges, particularly in the tracking and management of nontraditional forms of collateral. As firms attempt to keep up with what the competition deems satisfactory collateral, the technology for managing collateral has not. Firms need a system designed to model their own proprietary rules, calculations, and reports.
In the quest for alpha generation, what makes structured lending challenging from an operational perspective is the wide variety of non-traditional collateral types that banks, and trade financing firms are accepting to secure the loans. Usually, collateral takes the form of other financial assets, such as a:
- Portfolio of marketable securities
- Single stock position
- Stake in a hedge fund
Increasingly, institutions have been willing to look at less liquid assets, such as unlisted equities, derivative contracts, or insurance policies. A loan for a business investment may be collateralized by future revenue or cash flow projections of the business. These days, it is not uncommon for borrowers to put up tangible but hard-to-value assets such as private or commercial real estate, commodities, or even fine art collections as collateral. Yet, while this growing variety of collateral is helping to fuel growth in the category, it also makes the value of collateral difficult to track. That in turn makes it extremely difficult for institutions, as well as smaller lenders to operationalize and scale their structured lending business, or to gain a holistic view of their loan-to-value or LTV ratios and their risk exposure.
For these firms looking to diversify into non-traditional loan categories or scale and grow their existing business, they need a solution that can help overcome operational barriers and risk uncertainties that could stand in the way. Firms need to be able to market their specialized lending expertise and capabilities with greater confidence and take advantage of more opportunities in this growing and potentially profitable market.