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Assets under management (AUM) in the private debt market is
estimated to surge from $848 billion at end-2020 to $1.46
trillion in five years—an impressive 11.4% annual increase.
This level of growth is intensifying competition, with many hedge
funds launching their own private debt products. Meanwhile,
investor inflows are being ever more concentrated at the largest
funds and regulatory conditions continue to tighten.
As private debt AUM grows and competition intensifies, a once
"old-school" market segment heavily reliant on spreadsheets and man
hours is becoming more sophisticated and private debt managers are
increasingly waking up to the full competitive value that
technology can bring.
This theme emerged strongly in a webinar I moderated recently.
Co-sponsored by IHS Markit and AltAssets, "
Private Debt: Digital Transformation - Now or Never?" featured
panelists Karen Simeone, Managing Director at HarbourVest Partners,
a leading global alternative asset manager ($72 billion in AUM),
and Niels Bodenheim, the Head of Alternative Credit at NN
Investment Partners (€45 billion in private debt AUM).
The conversation explored how private debt managers leverage
technology to gain an edge in an increasingly competitive market.
It was an enlightening conversation that yielded a number of
important takeaways.
A single source of truth supports deeper analysis
Technology will not be replacing human judgment and
decision-making anytime soon (nor should we want it too). But it
can be a powerful amplifier for those things, even by enabling
something seemingly simple—such as a single, centralized
reference point that everybody in the team can refer to.
For Simeone, this allows lines of inquiry to go a step deeper.
Instead of team members looking at a piece of data and asking,
"What is this?" or "Does it really say that?", they can move to the
next level and ask, "What do you think about this?" They can spend
their time analyzing the data rather than validating it, which is
where the real value lies.
For instance, Simeone notes that in the credit space, where
investors are focused on limiting the downside, data analytics can
provide granular "base rates" that can be used to kick off further
evaluation. The deeper you can drill down into a specific
subsector, the better the quality of your analysis and
decision-making, which ultimately is the source of alpha generation
and returns.
Advanced integration capabilities ensure data flexibility
Today, private fund managers need far more than just core
financial data. ESG data, which has yet to be standardized, and
other private data sources—much of it unstructured and
qualitative—also form crucial market intelligence. Then there
are the increasing data demands from the fund's investors and
regulators.
In this environment, fund managers need their data to be
available in highly flexible formats. That
flexibility—including the ability to ingest data in a variety
of formats and sources as well as the availability of APIs that
enable that data to flow into other systems—is more important
than robust feature sets provided by the data management system
itself.
The prerequisite for these capabilities is robust integration.
This is something both Simeone and Bodenheim identified as a key
hurdle to increased tech adoption in private debt—a lack of
integration between disparate systems.
For instance, fund managers may need to exclude superfluous data
from analysis, apply bespoke metrics to specific proprietary
systems or reference multiple deal databases. The more flexibly
they can use their data, the wider the range of solutions they can
offer their clients, and the more effectively they can leverage
data to support their own unique and differentiating processes.
Finding the right solution requires not just a change in
technology but a change in mindset as well. Stakeholders need to
look beyond the impact on their individual job function, see the
bigger picture and envision how the data can support the
organization as a whole.
The focus shifts from data capture to data automation
As firms collect ever increasing volumes of data, they are
realizing the importance of being able to automate data capture as
much as possible.
Simeone and Bodenheim agreed that automated data capture could
enhance virtually every function, highlighting workstream
management, document review and deal notifications. More
indirectly, automation could also boost operating efficiencies by
ensuring things are executed properly the first time around.
Neither sees human decision-making being supplanted by machines
any time soon. But Bodenheim suggested that the next advancement in
workstream automation should come from integrating client
relationships—such as potential veto rights—into those
streams. In other words, where else could the "automated workstream
ecosystem" be expanded as technologies continue to evolve?
Both agreed that fund managers should not be in the data capture
and reconciliation business and that the process of collecting
statements, plugging those numbers into systems and reconciling
them is not the best use of their team's time and focus.
Outsourcing these functions to best-in-class software and service
providers such as IHS Markit, which offer both data systems and
services for their teams to leverage, can return much-needed time
that these teams can reallocate to strategic, high-value
activities.
Client satisfaction is at the heart of everything
Technology is a means, not an end, and for both Simeone and
Bodenheim, the ultimate end is client satisfaction. The more
satisfied your clients are, the more you can grow your AUM—it's
that simple.
For instance, operating efficiencies reduce costs, thereby
maximizing client value. Greater responsiveness is another way to
enhance client satisfaction, as clients today increasingly demand a
communication frequency and level of transparency more akin to the
public markets.
This extends to onboarding as well. Establishing the proper
workstreams makes the sensitive onboarding process smoother,
enabling firms to avoid repetitive information requests and focus
on the information that really matters.
The technological advantage
Technology has already become a source of differentiation among
private fund managers. This will only continue as competition
intensifies, regulations tighten and new technologies such as
tokenization become more mainstream.
At the larger industry level, fund managers may also need to
seriously consider collaborating more with each other to increase
data transparency across the board. The private nature of the
industry—and the fact that data can be a competitive
advantage—makes it difficult to obtain macro industry-level
data. But for the industry to evolve as a whole, that may be the
next necessary step forward.
Posted 01 June 2021 by Jocelyn Lewis, Executive Director, Private Debt Strategy, Financial Services, IHS Markit
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
