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Alternative Market Briefing

Money managers with high leverage under the most pressure from pandemic

Thursday, April 02, 2020

Laxman Pai, Opalesque Asia:

Money managers with high leverage and outsized exposure to equity-oriented strategies will come under the most pressure from market impacts caused by the coronavirus pandemic.

According to Fitch Ratings, the assets under management (AUM), earnings before interest, tax, depreciation, and amortization (EBITDA) and cash flow leverage of these managers will be hit most by increased volatility and market sell-offs.

While most traditional investment managers (IMs) continue to generate positive cash flows under stress, those with higher leverage are likely to have less flexibility in the event of a further broad market selloff.

Counterbalancing these pressures are the balance-sheet light and cash flow generative nature of the traditional IM business model, the ability to reduce expenses alongside revenue declines in order to maintain margins, low gross leverage levels, limited near-term debt maturities, strong cash balances and currently high payout ratios, which could be curtailed to preserve capital.

Fitch applied three uniform stress scenarios to a global peer group of Fitch-rated IMs and other large IMs with publicly available financial information. All three stress scenarios assume AUM declines, including a 30% drop in equities and a 20% decline in fixed income, a 5% reduction to fee rates and immediate net outflows of 7%.

Scenarios 1 and 2 apply a 10% drop in non-management fees or other revenue, while scenario 3 has a 20% drop. Sc......................

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