Adapting to the developments in the investment and securities industry is a must, if an asset management company is to survive. And in the past half-decade, keeping up with the changes has been pushing many fund managers to hire asset servicing firms.
Below are the industry trends that are facilitating this phenomenon:
Alternative investments on the rise. Amid the unpredictability of today’s investment climate, more client-investors are looking beyond the traditional options and exploring alternative products such as hedge funds. Industry pundits even predict that soon, we may not have to use ther term “alternative” any longer. Moreover, passive investments such as retirement plans that generally come with less opportunity for massive returns are also drawing attention, especially among those who have a lower risk appetite and prefer to pay lower fund management fees.
Transparency takes the spotlight. Across the country and the globe, a host of new regulations are emerging, while the implementation of the past policies are being strengthened. Regulatory bodies in the industry and in the government have deployed more forces as well as more advanced technologies and procedures to monitor noncompliance. These protocols especially highlight the importance of accountability and transparency, and observing these have since become top priority for many asset managers. In the face of this development, firms are required to undertake massive improvements in the way they handle their fund management processes and overall corporate governance.
Growing investor base. New client investors will be pouring in more capital to the industry. In fact, according to PricewaterhouseCoopers, the total amount of assets under management is expected to rise to $102 trillion – a truly sharp growth from being a $64 trillion-industry in 2012. Paving the way to this development is the rise of more mass affluent investors and high net worth individuals in North America, as well as the emergence of new markets in the growing economies of Asia, Africa, the Middle East, and South America. This development means an even more competitive industry, with fund managers fighting for their share of the pie, and also struggling to develop and manage new product offerings to their potential client-investors.
The support of asset servicing firms comes in handy in this context, as they offer the needed technology, platform, and manpower – the entire infrastructure – to take on the middle and back-office operations, from accounting, to tax reporting, to compliance management. This way, the portfolio managers can focus on such core functions as client relations and making strategic investment decisions.
Tuesday, November 15, 2016
Monday, August 29, 2016
Back office solutions: a must for every asset manager
There are three general components to most firms offering financial services, namely the front office, the middle office, and the back office. But why is the back office so important, especially in this day and age, and why are back office solutions often considered mandatory tools in the fund management space?
The back office plays a key maintenance role
Generally, the back office takes care of administrative duties, and does the number-crunching in accounting. There are some companies that integrate middle office tasks into the back office – these include, but are not limited to the processing and clearing of transactions. It depends from firm to firm, but the commonality therein is that the back office handles a lot of company maintenance-related tasks. And it is the back office that often serves as the proverbial straw stirring the drink, an often-overlooked, yet integral reason behind a company’s solvency, or lack thereof.
A good back office is cost-effective and minimizes costly errors
One reason why fund managers turn to back office solution providers is to save money, while minimizing the possibility of costly human errors. Hedge funds and other related companies deal with millions worth of money in their transactions, and a simple error could lead to a myriad of others, with money flowing down the drain as a result of these mistakes. And it can often be quite an expensive proposition to run one’s back office in-house.
Small- and mid-sized companies can benefit most from back office outsourcing
Although any company, regardless of size, can benefit from outsourcing their back office work to a third-party asset services firm, it is the smaller to mid-sized companies that have the most to gain. This eliminates the need to shoulder exorbitant fixed costs for various back office tasks, and allows them to make more inroads in a financial space that keeps getting more and more competitive.
To gain the most benefit from back office solutions, it is important to select one of the top third-party firms. They must have solid experience in the fund administration industry, and a great combination of skilled personnel and top-of-the-line proprietary solutions that hedge funds can leverage to their advantage. Many companies, including a good number of small and mid-sized ones, have reduced human error, saved money, achieved operational synergy, and caught up with their larger competition, thanks to top-tier products and platforms provided by the best asset servicing firms.
The back office plays a key maintenance role
Generally, the back office takes care of administrative duties, and does the number-crunching in accounting. There are some companies that integrate middle office tasks into the back office – these include, but are not limited to the processing and clearing of transactions. It depends from firm to firm, but the commonality therein is that the back office handles a lot of company maintenance-related tasks. And it is the back office that often serves as the proverbial straw stirring the drink, an often-overlooked, yet integral reason behind a company’s solvency, or lack thereof.
A good back office is cost-effective and minimizes costly errors
One reason why fund managers turn to back office solution providers is to save money, while minimizing the possibility of costly human errors. Hedge funds and other related companies deal with millions worth of money in their transactions, and a simple error could lead to a myriad of others, with money flowing down the drain as a result of these mistakes. And it can often be quite an expensive proposition to run one’s back office in-house.
Small- and mid-sized companies can benefit most from back office outsourcing
Although any company, regardless of size, can benefit from outsourcing their back office work to a third-party asset services firm, it is the smaller to mid-sized companies that have the most to gain. This eliminates the need to shoulder exorbitant fixed costs for various back office tasks, and allows them to make more inroads in a financial space that keeps getting more and more competitive.
To gain the most benefit from back office solutions, it is important to select one of the top third-party firms. They must have solid experience in the fund administration industry, and a great combination of skilled personnel and top-of-the-line proprietary solutions that hedge funds can leverage to their advantage. Many companies, including a good number of small and mid-sized ones, have reduced human error, saved money, achieved operational synergy, and caught up with their larger competition, thanks to top-tier products and platforms provided by the best asset servicing firms.
Tuesday, August 23, 2016
A Conundrum: The Telehealth Solution and Government’s Policy Support
Policy makers are major change-makers when it comes to the application of telehealth. Being a budding technology and practice, a significant hurdle currently faced by telehealth programs is the lack of standardized policies regarding telehealth.
As each state’s medical board defines the standard of care that physicians must provide to patients, these state medical boards have the power to decide whether physicians can provide telehealth services and the conditions under which they can provide it. Without proper guidance from the board, physicians become widely exposed to incurring risk, which leads to their reluctance to provide telehealth services.
In some states, physicians are required to establish physician-patient relationship through in-person encounters only, at least for the first of their patient-physician visits. This is based on the presumed difference in quality of care provided from the virtual encounter compared to an in-person one. These kinds of policies impede the adoption of telehealth. Patients are not allowed to consult with doctors they only met virtually. This limits the capability of physicians to provide healthcare services to remote locations and largely negates the purpose with which telehealth is developed.
Meanwhile, other states have crafted policies that affirmatively allow providers to establish a physician-patient relationship using telehealth. States such as West Virginia, Louisiana, Mississippi, and Texas, have provided provisions for the applications of telehealth albeit using different standards for practice within each of these states.
But this is not an isolated case: all states set their own laws and regulations; there are no national standards for telehealth. This lack of uniformity creates a serious legal obstacle for physicians who wish to practice medicine in multiple states.
States do not even have a consistent definition of what is considered as telehealth. For example, some states may require telehealth to involve real-time communication whereas others allow asynchronous messaging between patients and providers. Or one state may consider telehealth to include phone-based interactions while another requires interactive video.
These definitions may not even be internally consistent, as some states may have one definition for the general population and another set of rules for their Medicaid program. This complexity means that telehealth providers must research and adhere to different rules depending on where their patients are located and who is their insurer. Creating a consistent definition for telehealth among all states is a necessary step towards unlocking telehealth services that can be scaled nationally.
Castro, Miller, and Nager in a report for the Information Technology and Innovation Foundation entitled “Unlocking the Potential of Physician-to-Patient Telehealth Services” (May 2014) wrote:
Clearly, there is a lack of consistency between states’ finding policies for telehealthcare delivery, and absence of a straightforward, uniform policy for funding may pose a significant obstacle to this technology’s adoption.
Telehealth is a welcome development amid a chronic disease crisis in our country, where the continuous rise of the population affected with chronic illnesses is aggravating the already dire situation and causing the cost of health care services to skyrocket.
Sadly, the health industry in its current structure is leading us down an unsustainable path. If not addressed properly, the average American will lose the ability to access health care. This loss will result in even greater social and economic costs – from further stress on the health care sector, to diminished workers’ productivity, to the overall deterioration of all Americans’ quality of life.
With the rise of telehealth, we are seeing an opportunity to save the healthcare industry. Through the use of technologies available to the average American, health care services particularly for chronic illnesses could become less costly and of higher quality. Indeed, patterns across states show that telehealth has not only improved health care delivery but the way our society approaches health.
To encourage widespread adoption of telehealth, the following critical factors must be considered or addressed. Leading these factors is the lack of proper network infrastructures to address the demand for telehealth technologies. Without the proper infrastructure, no telehealth program will completely succeed. Stakeholders have recognized this and are taking steps to address it. Another consideration is financing sources for sustainable growth. Like other technologies, telehealth needs financing in order to continuously innovate. Several financing options, both public and private, are present.
Training of both practitioners and patients as well as capacity-building is also necessary. It is a big help that the technologies used in telehealth are mostly commercially available and are now deeply ingrained in the lives of people (i.e.., Internet, mobile communications, television, etc.). This familiarity with many everyday telecommunications tools used by all strata of society by people who have attained many different levels of education may auger in an easy transition for many people to use telehealth technologies for their healthcare needs.
Finally, policymakers must also do their share in order to encourage the use of telehealth. This move includes promoting a more standardized approach to telehealth programs, developing state policies that advance rather than impede telehealth applications, and deciding on ways to make healthcare reimbursement and coverage applicable to telehealth services.
There is a lot of work to do before we can fully reap the benefits of telehealth. But with the proper steps taken by all stakeholders, a society with improved access to quality health care through telehealthcare is a vision we can all look forward to and work on together to realize its development.
New opportunities are emerging for companies to provide industry solutions as a result of The Obamacare Health Care Act (ACA). Some of these companies are:
HExL
Richard A. Kimball, Jr. is CEO and Founder of HExL, a company that enables independent primary physicians to transform their practices financially and clinically to drive better health outcomes, lower costs and improve accessibility. We offer a turnkey technology enabled service enabling primary care physicians to enter into value based reimbursement programs and to be paid for keeping patients healthy.
Evolent Health
Frank Williams is CEO and Co-Founder of Evolent. This company provides the integrated technology, tools and team to advance value-based care. Our work begins with the Blueprint, an immediately actionable strategic roadmap that defines target markets, assesses needed clinical and operational capabilities, and is supported by a detailed business case.
Health Care Partners
Kent Thiry is CEO of Health Care Partners, a company that has been committed to developing innovative models of healthcare delivery that improve our patients' quality of life while containing healthcare costs. Our strength is in our steadfast commitment to our guiding principle of coordinated care. Our physicians strive daily to bring the benefits of coordinated care to more than 600,000 managed care patients in California, who represent the diversity of cultures, socioeconomic groups, ages, and health statuses in the communities we serve.
As each state’s medical board defines the standard of care that physicians must provide to patients, these state medical boards have the power to decide whether physicians can provide telehealth services and the conditions under which they can provide it. Without proper guidance from the board, physicians become widely exposed to incurring risk, which leads to their reluctance to provide telehealth services.
In some states, physicians are required to establish physician-patient relationship through in-person encounters only, at least for the first of their patient-physician visits. This is based on the presumed difference in quality of care provided from the virtual encounter compared to an in-person one. These kinds of policies impede the adoption of telehealth. Patients are not allowed to consult with doctors they only met virtually. This limits the capability of physicians to provide healthcare services to remote locations and largely negates the purpose with which telehealth is developed.
Meanwhile, other states have crafted policies that affirmatively allow providers to establish a physician-patient relationship using telehealth. States such as West Virginia, Louisiana, Mississippi, and Texas, have provided provisions for the applications of telehealth albeit using different standards for practice within each of these states.
But this is not an isolated case: all states set their own laws and regulations; there are no national standards for telehealth. This lack of uniformity creates a serious legal obstacle for physicians who wish to practice medicine in multiple states.
States do not even have a consistent definition of what is considered as telehealth. For example, some states may require telehealth to involve real-time communication whereas others allow asynchronous messaging between patients and providers. Or one state may consider telehealth to include phone-based interactions while another requires interactive video.
These definitions may not even be internally consistent, as some states may have one definition for the general population and another set of rules for their Medicaid program. This complexity means that telehealth providers must research and adhere to different rules depending on where their patients are located and who is their insurer. Creating a consistent definition for telehealth among all states is a necessary step towards unlocking telehealth services that can be scaled nationally.
Castro, Miller, and Nager in a report for the Information Technology and Innovation Foundation entitled “Unlocking the Potential of Physician-to-Patient Telehealth Services” (May 2014) wrote:
Another major barrier to the widespread adoption of telehealth has been lack of consistent reimbursement policies for telehealth services. Reimbursement policies vary from state to state. Each state determines whether its Medicaid program will reimburse for particular telehealth services and under what conditions. For example, some states only reimburse for telehealth services in certain geographic regions, such as rural or underserved areas within the state. Others restrict patients from obtaining telehealth services in their home, instead requiring them to be at a clinic. Overall, every state’s Medicaid program except Iowa, Massachusetts, New Hampshire, New Jersey, and Rhode Island reimburses at least some telehealth services, such as live video encounters. However, only seven states (Alaska, Arkansas, Hawaii, Illinois, Minnesota, New Mexico, and Vermont) allow Medicaid reimbursements for “store-and-forward” services such as tele-dermatology, which happen asynchronously. Only ten states (Alabama, Alaska, Colorado, Kansas, Louisiana, Minnesota, New York, Texas, Utah, and Washington) offer Medicaid reimbursement for remote patient monitoring in the home. States also can determine whether private insurers will reimburse for telehealth services. Twenty-one states have passed laws requiring private insurers to cover some form of telehealth. For example, Montana and Virginia require insurers to cover telehealth services and reimburse at the same rate they would for in-person services. Other states, like Georgia, New Mexico, and Texas only require coverage, but do not require that the reimbursement rate be equal to in-person services. Reimbursement policies have an impact on telehealth adoption: hospitals are more likely to adopt telehealth if they are in states requiring private payers to reimburse telehealth services at the same rate as in-person services.
Clearly, there is a lack of consistency between states’ finding policies for telehealthcare delivery, and absence of a straightforward, uniform policy for funding may pose a significant obstacle to this technology’s adoption.
Telehealth is a welcome development amid a chronic disease crisis in our country, where the continuous rise of the population affected with chronic illnesses is aggravating the already dire situation and causing the cost of health care services to skyrocket.
Sadly, the health industry in its current structure is leading us down an unsustainable path. If not addressed properly, the average American will lose the ability to access health care. This loss will result in even greater social and economic costs – from further stress on the health care sector, to diminished workers’ productivity, to the overall deterioration of all Americans’ quality of life.
With the rise of telehealth, we are seeing an opportunity to save the healthcare industry. Through the use of technologies available to the average American, health care services particularly for chronic illnesses could become less costly and of higher quality. Indeed, patterns across states show that telehealth has not only improved health care delivery but the way our society approaches health.
To encourage widespread adoption of telehealth, the following critical factors must be considered or addressed. Leading these factors is the lack of proper network infrastructures to address the demand for telehealth technologies. Without the proper infrastructure, no telehealth program will completely succeed. Stakeholders have recognized this and are taking steps to address it. Another consideration is financing sources for sustainable growth. Like other technologies, telehealth needs financing in order to continuously innovate. Several financing options, both public and private, are present.
Training of both practitioners and patients as well as capacity-building is also necessary. It is a big help that the technologies used in telehealth are mostly commercially available and are now deeply ingrained in the lives of people (i.e.., Internet, mobile communications, television, etc.). This familiarity with many everyday telecommunications tools used by all strata of society by people who have attained many different levels of education may auger in an easy transition for many people to use telehealth technologies for their healthcare needs.
Finally, policymakers must also do their share in order to encourage the use of telehealth. This move includes promoting a more standardized approach to telehealth programs, developing state policies that advance rather than impede telehealth applications, and deciding on ways to make healthcare reimbursement and coverage applicable to telehealth services.
There is a lot of work to do before we can fully reap the benefits of telehealth. But with the proper steps taken by all stakeholders, a society with improved access to quality health care through telehealthcare is a vision we can all look forward to and work on together to realize its development.
New opportunities are emerging for companies to provide industry solutions as a result of The Obamacare Health Care Act (ACA). Some of these companies are:
HExL
Richard A. Kimball, Jr. is CEO and Founder of HExL, a company that enables independent primary physicians to transform their practices financially and clinically to drive better health outcomes, lower costs and improve accessibility. We offer a turnkey technology enabled service enabling primary care physicians to enter into value based reimbursement programs and to be paid for keeping patients healthy.
Evolent Health
Frank Williams is CEO and Co-Founder of Evolent. This company provides the integrated technology, tools and team to advance value-based care. Our work begins with the Blueprint, an immediately actionable strategic roadmap that defines target markets, assesses needed clinical and operational capabilities, and is supported by a detailed business case.
Health Care Partners
Kent Thiry is CEO of Health Care Partners, a company that has been committed to developing innovative models of healthcare delivery that improve our patients' quality of life while containing healthcare costs. Our strength is in our steadfast commitment to our guiding principle of coordinated care. Our physicians strive daily to bring the benefits of coordinated care to more than 600,000 managed care patients in California, who represent the diversity of cultures, socioeconomic groups, ages, and health statuses in the communities we serve.
Monday, May 30, 2016
Family Offices: Helping families manage their wealth across generations
Taking into account the specialized knowledge and assistance required to manage one’s money intelligently, high-net worth individuals have taken to engaging the services of family offices.
Whether one has inherited wealth or created it, the discerning investor ultimately wishes protect and nurture it in order to benefit his family over the long term. This is easier said than done, however, considering that a single bad investment or clan dispute can be all it takes to tank a fortune that took years – perhaps even generations – to build.
Rising demand
Family offices – which could be part of a traditional bank or a more boutique outfit – are wealth management firms that tend to the financial needs and goals of an affluent individual or family. Their benefits are as elite as the clientele: in additional to the traditional investment advising, estate planning, tax accounting, and consulting on various financial moves, they also offer white-glove perks such as the handling of art and other collections, tracing medical and genealogical history to help the clients better understand their heritage, and teaching the younger generations the value of money and how to use it well in the future.
While family offices have been around since the 19th century, demand for them has increased over the years, especially for their financial planning and asset coordination functions, culminating in the 2008 financial crisis. With this background, managers in these offices work to help a family navigate the current economic landscape so that they can achieve their financial objectives.
Optimizing operations
Given the array of services to be delivered and the bespoke needs of its clients, managers overseeing a particular family’s portfolio need to remain abreast of the latest wealth management trends and optimize their operations so as to remain efficient at their core task: growing their wealth.
Asset servicing companies can help free up managers to focus on strategy and decision-making on behalf of their clients by providing them with fund administration support.
Their middle and back office solutions include daily cash, position, and trade reconciliation across all counterparties, portfolio level analytics including performance attribution and risk metrics as well as comprehensive financial reporting, accounting, compliance, and tax services. Cloud-based reporting platforms also allow managers to access their data from any browser, aiding them in their analysis.
With the help of asset servicing companies that streamline back end operations, managers in family offices can focus on what they do best – providing a family with the best financial advice for its future.
Whether one has inherited wealth or created it, the discerning investor ultimately wishes protect and nurture it in order to benefit his family over the long term. This is easier said than done, however, considering that a single bad investment or clan dispute can be all it takes to tank a fortune that took years – perhaps even generations – to build.
Rising demand
Family offices – which could be part of a traditional bank or a more boutique outfit – are wealth management firms that tend to the financial needs and goals of an affluent individual or family. Their benefits are as elite as the clientele: in additional to the traditional investment advising, estate planning, tax accounting, and consulting on various financial moves, they also offer white-glove perks such as the handling of art and other collections, tracing medical and genealogical history to help the clients better understand their heritage, and teaching the younger generations the value of money and how to use it well in the future.
While family offices have been around since the 19th century, demand for them has increased over the years, especially for their financial planning and asset coordination functions, culminating in the 2008 financial crisis. With this background, managers in these offices work to help a family navigate the current economic landscape so that they can achieve their financial objectives.
Optimizing operations
Given the array of services to be delivered and the bespoke needs of its clients, managers overseeing a particular family’s portfolio need to remain abreast of the latest wealth management trends and optimize their operations so as to remain efficient at their core task: growing their wealth.
Asset servicing companies can help free up managers to focus on strategy and decision-making on behalf of their clients by providing them with fund administration support.
Their middle and back office solutions include daily cash, position, and trade reconciliation across all counterparties, portfolio level analytics including performance attribution and risk metrics as well as comprehensive financial reporting, accounting, compliance, and tax services. Cloud-based reporting platforms also allow managers to access their data from any browser, aiding them in their analysis.
With the help of asset servicing companies that streamline back end operations, managers in family offices can focus on what they do best – providing a family with the best financial advice for its future.
Sunday, April 3, 2016
The value of outsourcing fund administration
Among hedge funds, private equity companies, and many other players in the securities industry, outsourcing fund administration has become ever more commonplace. Fund administration covers financial reporting, accounting, daily, weekly, and monthly computation of NAV or Net Asset Value, and fund portfolio valuation, among other roles.
This article discusses the value of following this growing trend.
Through fund administrators, asset managers can access scalable solutions. The world of fund management is a complex one, and challenges here need to be met with the solution that responds to their nature. Asset managers need to display a commitment to keep tabs on –and adapt to – the developments in the market. This, in turn, calls for scalable solutions that will provide just the right kind of support based on the manager’s assessment of such factors as the investment risks, the yield rate, and the opportunities for growth. Fund administrators can provide this, because they have the time and resources to develop customized tools for the asset management firms that they serve.
Fund administrators can take on the red tape and compliance duties. Dealing in fund management entails facing bureaucracy at different levels. This can refer to negotiating with industry regulators, preparing the many reports that must be submitted on a regular basis, and ensuring that company practices adhere to the pertinent federal laws. Fund administrators can also take care of preparing and filing reports to local regulatory bodies, and monitor fund movements vis a vis anti-money laundering rules.
With their assistance, day-to-day fund management operations become much more efficient. Fund administrators have mastered – and have the tools for – the tedious tasks that come with fund management. For example, they can deftly handle the calculation of the yield and other metrics important to the client, conduct regular valuation and asset verification, price securities based on the present market value, and perform daily reconciliation of statements of the investment manager, the bank, and all involved brokers. On a daily basis, they also oversee the purchase and sale of securities, as well as distribute the dividends arising therefrom.
Truly, in many ways, fund administration services help asset management firms promote efficiency in their operations, and let them be more responsive to the demands of the market. With their assistance in all phases of fund management, managers will see a much higher level of quality of operations, one that greatly benefits from automation, real-time information delivery, and consistency of results.
This article discusses the value of following this growing trend.
Through fund administrators, asset managers can access scalable solutions. The world of fund management is a complex one, and challenges here need to be met with the solution that responds to their nature. Asset managers need to display a commitment to keep tabs on –and adapt to – the developments in the market. This, in turn, calls for scalable solutions that will provide just the right kind of support based on the manager’s assessment of such factors as the investment risks, the yield rate, and the opportunities for growth. Fund administrators can provide this, because they have the time and resources to develop customized tools for the asset management firms that they serve.
Fund administrators can take on the red tape and compliance duties. Dealing in fund management entails facing bureaucracy at different levels. This can refer to negotiating with industry regulators, preparing the many reports that must be submitted on a regular basis, and ensuring that company practices adhere to the pertinent federal laws. Fund administrators can also take care of preparing and filing reports to local regulatory bodies, and monitor fund movements vis a vis anti-money laundering rules.
With their assistance, day-to-day fund management operations become much more efficient. Fund administrators have mastered – and have the tools for – the tedious tasks that come with fund management. For example, they can deftly handle the calculation of the yield and other metrics important to the client, conduct regular valuation and asset verification, price securities based on the present market value, and perform daily reconciliation of statements of the investment manager, the bank, and all involved brokers. On a daily basis, they also oversee the purchase and sale of securities, as well as distribute the dividends arising therefrom.
Truly, in many ways, fund administration services help asset management firms promote efficiency in their operations, and let them be more responsive to the demands of the market. With their assistance in all phases of fund management, managers will see a much higher level of quality of operations, one that greatly benefits from automation, real-time information delivery, and consistency of results.
Monday, February 1, 2016
Middle and Back Office Support Helps Business Development Companies Deal with Risks
In the aftermath of the 2008 financial crisis, banks became the subject of tighter industry regulation, media attention, and public scrutiny, all of which set limitations on their financing opportunities especially for mid-market companies. Rising in their stead are business development companies (BDCs), which are investment vehicles that raise capital particularly to fund small and middle-sized businesses.
But in this endeavor, BDCs face different kinds of risks. Here are three of them:
Leverage risk. To be able to fund businesses, BDCs first raise capital from such sources as corporate bonds, equity offerings, and convertible bonds. These borrowed funds compose majority of their investments, and the goal is for the gains from these investments to exceed the interest that their loans will incur. If the investment does not generate returns, the BDC will have to take losses.
Liquidity risk. BDCs are categorized as publicly traded companies, and are therefore considered liquid. However, the businesses they invest in are private, and are then not liquid. Through strategies like taking the company public through an IPO or facilitating a buyout, BDCs hope to make a profit and be able to settle their debt, distribute cash to their investors, and find more capital to invest. But within their portfolio, BDCs may find it hard to liquidate assets, and the longer the process takes, the more interests they must pay.
Interest rate risk. Finally, as entities that both borrow and lend, the best case scenario for BDCs is to find providers of long-term loans with low fixed rates, and small businesses willing to borrow short-term loans at variable rates. In reality, BDCs are subject to the volatile nature of the interest rates. The risk is that when they borrow to pay off their original loans and acquire more funds to invest, the rates have risen, making the capital now more expensive.
To deal with these risks, business development companies need to invest towards an infrastructure that promotes swift but informed decision-making, superior investor relations, and smooth operations in multiple market cycles.
Central to this infrastructure is a robust middle and back office, consisting of experienced personnel utilizing cutting edge technologies to handle recordkeeping, accounting, treasury, due diligence, and tax reporting cost-efficiently and under exacting standards. With their help, BDCs can easily evaluate and manage the risks that are inherent in their business, and satisfy the investment goals of their investor clients as well as their own.
But in this endeavor, BDCs face different kinds of risks. Here are three of them:
Leverage risk. To be able to fund businesses, BDCs first raise capital from such sources as corporate bonds, equity offerings, and convertible bonds. These borrowed funds compose majority of their investments, and the goal is for the gains from these investments to exceed the interest that their loans will incur. If the investment does not generate returns, the BDC will have to take losses.
Liquidity risk. BDCs are categorized as publicly traded companies, and are therefore considered liquid. However, the businesses they invest in are private, and are then not liquid. Through strategies like taking the company public through an IPO or facilitating a buyout, BDCs hope to make a profit and be able to settle their debt, distribute cash to their investors, and find more capital to invest. But within their portfolio, BDCs may find it hard to liquidate assets, and the longer the process takes, the more interests they must pay.
Interest rate risk. Finally, as entities that both borrow and lend, the best case scenario for BDCs is to find providers of long-term loans with low fixed rates, and small businesses willing to borrow short-term loans at variable rates. In reality, BDCs are subject to the volatile nature of the interest rates. The risk is that when they borrow to pay off their original loans and acquire more funds to invest, the rates have risen, making the capital now more expensive.
To deal with these risks, business development companies need to invest towards an infrastructure that promotes swift but informed decision-making, superior investor relations, and smooth operations in multiple market cycles.
Central to this infrastructure is a robust middle and back office, consisting of experienced personnel utilizing cutting edge technologies to handle recordkeeping, accounting, treasury, due diligence, and tax reporting cost-efficiently and under exacting standards. With their help, BDCs can easily evaluate and manage the risks that are inherent in their business, and satisfy the investment goals of their investor clients as well as their own.
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