Institutional investors target structured finance despite regulation worries

Institutional investors are expected to rapidly increase allocations to structured finance and securitisations over the next two years despite concerns about regulation in the sector, new research from Ocorian, a market leading bond trustee and loan agency provider, shows.

Increased innovation in the asset class is attracting greater interest from institutional investors, Ocorian’s international study with capital markets executives found.

Almost all (94%) questioned say allocations will rise with nearly half (48%) forecasting a rise of between 25% and 75% over the next two years. None of the capital markets executives expect allocations to fall while 6% believe allocations will remain at current levels.

The expected rise in allocations is being delivered even though there are concerns about regulation of the structured finance market. Around 90% questioned agree that there is a need to improve regulation with 44% strongly agreeing with the need for enhanced regulation.

Regulatory concerns however are being over-ridden by other benefits for institutional investors from allocating funds to structured finance and securitisation products. Capital markets executives highlighted increased innovation in the sector as the key benefit and the prospect of attractive returns when equities decline as the second biggest benefit.

The asset class’s defensive qualities driven by increasingly risk adjusted returns was identified as the third biggest benefit while the increasing level of choice, increasingly attractive yields and initial signs of improved regulation were also highlighted as potential benefits.

Capital markets executives also expect regulation across the sector to improve – around 92% believe the level of regulation will increase over the next five years with 24% expecting a dramatic increase.

Christoph Schwarz, Business Development Director at Ocorian said: “There is a growing expectation that institutional investors will dramatically increase allocations to structured finance instruments and securitisations as increased innovation in the sector drives interest.

“It seems regulation however remains a major concern to investors in the sector and could be a drag on increased allocations despite the other benefits that structured finance products provide for institutional investors.

“Regulation is expected to improve but institutional investors need to be careful and selective with allocations to the sector and work with expert partners who can provide the necessary support.”