- In an environment of high interest rates and increased caution in financing, securitization is a vehicle for private equity firms to obtain resources and reallocate risks.
- Securitization also diversifies capital sources and offers exposure to international markets, benefiting even small and medium-sized enterprises (SMEs).
- FlexFunds facilitates this process by creating customized and global investment vehicles, such as exchange-traded products (ETPs). This allows companies to provide liquidity to illiquid assets, reduce banking dependency, and expand their investor base.
In a difficult financing environment due to globally high interest rates and more cautious investors, companies face challenges in obtaining fresh resources to launch their projects. Given these circumstances, private equity firms are turning to securitization as a vehicle to leverage and for issuers to reassign credit risk. FlexFunds explains why.
FlexFunds’ solutions simplify the distribution of investment portfolios and the access to international private banking, having crossed borders and reached a global dimension in a highly competitive market.
Distribution is key for private equity firms to expand their investor base with the help of asset managers, who can offer their clients a broader financing horizon to scale their projects.
Securitization allows private equity firms to provide liquidity to illiquid assets, helping to overcome the challenges of high interest rates and investor caution-
In this context, companies of various sizes turn to instruments such as securitization, which allows them to convert illiquid assets, derived from future income like accounts receivable, into financing to launch their established projects across different industries.
According to a publication by BID Invest, the private arm of the bank, securitization can serve as an instrument to reduce dependence on bank financing while also helping companies make inroads into capital markets, particularly in productive segments such as SMEs in various sectors.
Securitization is a formula to expand the investor base, as it gives greater exposure to issuers in an increasingly globalized market and allows them to access financing in stronger currencies.
From the perspective of financial institutions, they “can transfer portfolio risks and sell their assets as securities, which allows them to free up capital that can be used to grant new loans and, consequently, improve credit availability for borrowers,” adds BID Invest1.
Securitization reduces dependence on bank financing, diversifies capital sources, and offers greater exposure to global markets-
How does securitization work?
Companies that use this mechanism group a series of cash flow-generating assets to repackage and sell them as securities to obtain financing and expand their investor base.
Securitized securities can be backed by assets such as mortgage loans, stocks, bonds, and properties, among others, which global investors continuously track in different markets, including emerging regions like Latin America.
According to a report by asset manager BlackRock2, securitized assets have a low correlation with other fixed-income sectors and are less sensitive to interest rate fluctuations. The report explains that this is mainly due to the variable-rate nature of most of these assets.
FlexFunds facilitates the creation of customized global investment vehicles, such as ETPs, simplifying distribution and access to international financing-
Following the pandemic, the global economy has faced a series of external pressures that have directly impacted the financing landscape and especially hit segments such as venture capital, pushing companies to diversify sources of capital raising and to obtain credit.
In this regard, a recent report by Moody’s Ratings agency indicates that the main themes affecting global credit quality in 2024 are higher interest rates for longer, reforms and regulations, adaptation to structural changes, and political polarization due to changes in government priorities and social demands.
Securitization in asset managers’ portfolios
By allowing the repackaging of different types of assets, securitization provides different risk levels to buyers, and investors can diversify their portfolios by investing in a variety of underlying assets, expanding their exposure to other markets.
By including it in their portfolio, asset managers can offer their clients an opportunity to expand the types of assets they can gain exposure to while diversifying risk in a broader portfolio instead of centralizing it in a single issuer, according to BID Invest.
By securitizing, the investor base is expanded, asset liquidity is improved, and asset managers can offer a greater variety of investments, diversifying risk in portfolios-
FlexFunds facilitates this process through the creation and launch of independent investment vehicles via an asset securitization program. Through this process, exchange-traded products (ETPs) are created to facilitate the management of strategies and their global distribution to investors outside the U.S.
At FlexFunds, these are called “FlexETP®” due to the flexibility and customization of the issuance’s name. The FlexFunds securitization program is versatile, allowing for the securitization of various assets. Additionally, the investment vehicles are tailored to the specific needs of each client.
Some characteristics of this vehicle include facilitating capital raising, diversifying financing sources, and being based on a wide range of assets, among others. If you manage or plan to launch a private investment fund, private equity real estate fund, or hedge fund, ETPs can be an alternative to structuring your strategy.
Sources:
- 1https://idbinvest.org/en/blog/development-impact/securitization-tool-issuers-reallocate-credit-risk-and-widen-investor-base
- 2https://www.blackrock.com/institutions/en-us/insights/the-case-for-securitized-assets
