Moody's Investors Service plans to adopt new guidelines to enable the firm to better assess the risk factors for alternatives managers and the balance-sheet risk among traditional managers, and is asking managers for input.
The proposed changes stem from “volatile markets, growth in regulation and growth in competition” in a post-crisis world, according to Moody's request for comment.
Current market conditions, Moody's says, have produced the following trends: changes in the product landscape (specifically an increase in alternative investments); increased variability of performance fees; expansion beyond home markets to grow assets under management; and greater use of firms' balance sheets to support its objectives.
To address industry changes, Moody's has proposed the following modifications to its rating methodology:
- assignment of greater weight to financial vs. business profile;
- adjustments to financial and profitability metrics to better account for performance fees, which can represent a large proportion of an alternative money manager's revenues and earnings;
- adjustment to the assessment of financial flexibility to account for money managers' greater use of their balance sheets today; and
- enhancements to and simplification of some rating factor metrics to better capture market position and business diversification.