Alter Domus is excited to be attending the InvestOps Conference this March 10-12. Visit us at booth #83 to explore our innovative solutions designed to streamline investment operations and enhance your business efficiency. We look forward to connecting with industry professionals and discussing the future of investment operations. See you there!
Our team attending- Lizzie Heil, Stephanie Golden, Darrell Pisarra, and Devin Vasquez. See you there!
We’re heading to Viva Las Vegas for Structured Finance Association SF Vegas conference. Tuesday, our Global Segment Head of Debt & Capital Markets Greg Myers will be speaking on the panel “The Future of Private Credit – Transparency, Regulation, and Valuation Challenges Impacting Institutional Investors 4:10-5:00 PM. We’re excited to be back at this premier networking event. Stop by our booth #62 to discover how we can help streamline your-back-office operations. Other attendees include David Traverso, Kennedy Glasscock, John Coviello, Pete Himes, Randall Reider, and Tim Ruxton.
Tom Gandolfo
United States
Head of Sales & Relationship Management North America
The AD Score – An objective framework for optimal portfolio allocation
Optimal portfolio allocation in fixed income is a vital part of any investment decision, and it remains an important topic of discussion. This concept applies across all fixed income assets, including investment-grade debt, high-yield bonds, leveraged loans, structured credit, and private debt. To guide investors in their fixed income portfolio allocation decisions, Alter Domus has developed the AD Score – an objective framework that asset managers can use to optimize fixed income portfolio allocations.
Rudolph Bunja
Head of Portfolio Credit Risk
Portfolio optimization is a cornerstone of modern asset management, aiming to balance risk/return, promote portfolio diversification, and improve overall portfolio efficiency.
Fixed income managers actively seek to optimize their portfolio allocations such that the portfolio is expected to generate the maximum return with the least amount of risk. In this context, managers may apply an internal scoring methodology to grade assets as part of their investment decisions. These scoring methods in many cases rely on a weighted approach based on certain factors, many of which may be subjective. In addition, managers may rely significantly on a single guiding metric, such as yield, but still need to further control for other factors, such as credit risk, to be comparable.
Investment decisions are further complicated by various constraints. Constraints may be market driven, such as the availability of investments or market prices. Investor-mandated factors such as average credit quality, percentage limitations and duration may also come into play, as do regulatory factors, such as SEC, NAIC, Federal Reserve, Basel III rules.
These constraints can apply across all areas in fixed income, whether the asset is an investment grade credit, a high-yield bond, a broadly syndicated loan, private debt or structured credit. Constraints could also extend to other ‘cash flow intensive’ investments, such as commercial real estate and infrastructure.
Given the myriad factors that investors must consider, it comes as no surprise that portfolio optimization in fixed income is a sophisticated process with complex methods and techniques.
In this paper we present a framework designed to address these complex portfolio allocation challenges. This framework offers a single universal metric, the Alter Domus Score (‘ADS’), which can arm managers with a solution for efficiently measuring an optimal portfolio allocation that is objective and comparable across any fixed income investment.
The ADS, which is an asset-based measure, is also robust and controls for information relevant to any fixed income investment, ranging from cashflow characteristics and credit worthiness to market price, pre-payment, and illiquidity costs.
We will detail the elements of the ADS, including the underlying framework, and illustrate the relationship between the ADS and changes to certain key asset-based characteristics.
Why Trade Optimization?
Trade optimization addresses a fundamental economic problem: maximizing the efficient and productive use of limited resources, specifically investable capital. Fixed income managers must, therefore, choose from among various investment opportunities to maximize the overall portfolio return given each investment’s attributes, which include cashflows, credit risk, and market price.
In most cases, managers are also faced with a variety of constraints, such as credit quality, maturity, and diversification limits, to name but a few, which adds more complexity to their decision-making process.
Essentially, managers aim to navigate these variables to deliver the best value for their investments.
The ADS presents a framework that relies on a single metric and objectively accounts for economic factors that are key to any fixed income investment. This framework is particularly valuable for managers bound by constraints, helping them to make the best investment allocations when weighing tradeoffs. The ADS serves as a complement and support to existing methods used by investment managers.
The ADS: an objective and universal measure for trade optimization
The ADS is an objective measure that is rooted in fixed income theory.
Essentially, it represents the discounted and risk-adjusted cashflows for any expected stream of cash flows, including fixed income instruments, such as bonds, loans, and asset-backed securities (ABS).
The ADS is easily comparable across all securities since it is a measure based on a single dollar (or any currency) value at risk. This feature allows any prospective universe of fixed income investments to be rank ordered on a pro-forma basis to determine an optimal portfolio allocation that is subject to constraints.
The score means that a fixed income investor can compare a bond to a loan or an ABS security – or even a real estate investment – when selecting the optimal portfolio allocation investment decision.
The score is agnostic as to the type of underlying investment and relies on the individual cashflow characteristics of the asset, factoring in the time value of the expected cash flow and uncertainties due primarily to the credit risk of the borrower and potential prepayments.
Digging into the detail: the formula behind the ADS
The ADS is calculated based on the following formula (see Appendix for detailed description of inputs).
To make effective comparisons across assets, the outstanding principal balance of the asset is first normalized to an indexed value of 1, which results in the market value (MV) to be a percentage of the indexed value. Therefore, we can break down the key inputs into two groups – one group is based on asset-specific attributes and the other reflects cashflow uncertainties.
To present it simply, the numerator represents the present value of the risk-adjusted weighted cashflows over the duration of the asset, the Cashflows Risk-Adjusted Value (C-RAV) while the denominator is the MV[1].
Some key factors to consider are that the risk related inputs can be based on the manager’s judgement or can be used to gather insight as to what the market value implies.
The ADS can also be used to generate trade ideas for making asset substitutions, when, for example, seeking a better relative-value opportunity, and thus can increase the likelihood that a portfolio will be better off or more optimal.
Applying the ADS in different scenarios
It is noteworthy to begin highlighting three possible scenarios of the ADS for any given security.
ADS > 1 (i.e., C-RAV > MV),
ADS < 1 (i.e., C-RAV < MV), and
ADS = 1 (i.e., C-RAV = MV).
Example 1: In cases where the ADS score is greater than 1, the time-value adjusted and risk-adjusted cashflows based on the manager’s expectations is greater than what the market price is reflecting. The asset is therefore ‘undervalued’, as indicated by the asset’s risk/return profile.
These are assets that offer the manager favorable investment characteristics, as the value of the risk-adjusted cash flows is greater than the price to acquire those cash flows.
Example 2: In cases where the ADS is less than 1, the time-value adjusted and risk-adjusted cashflows based on the manager’s expectations is less than what the market price is reflecting. The asset is thus ‘overvalued’, as indicated by the asset’s risk/return profile.
The manager will seek to sell these assets since the proceeds from those sales would exceed the manager’s fundamental assessment of what those cash flows are worth.
Example 3: In cases where the ADS score is equal to 1, the time-value adjusted and risk-adjusted cashflows based on the manager’s expectations is equal to what the market price is reflecting. So, the asset is ‘fairly valued’, as indicated by the asset’s risk/return profile. These assets have market values consistent with the manager’s fundamental assessment, and the manager would therefore be indifferent to holding, buying, or selling these assets.
When working through these scenarios, it becomes clear that a manager can begin to utilize the ADS as a metric for comparing and effectively rank-ordering decisions across different types of fixed income assets.
The ADS can also be used as a tool to inform the manager as to what the risk-based inputs the market is implying. With these inputs on hand, the manager can better assess whether an asset’s market price is rich or cheap.
Manager judgement, of course, is an important element to calculating the ADS.
The ADS could be pre-populated with apparently objective inputs and additional manager overlay could significantly improve the quality of the ADS and its utility as a tool to support portfolio optimization.
Assessment of prepayment rates and credit risk inputs are informed by asset manager expertise and play a big role in calculating the ADS.
Dissecting the AD-Score
The tables below illustrate the relationship between the ADS and changes to certain key inputs holding all else equal. We have intentionally kept the analysis simple so that we could better illustrate the mechanics behind the score.
A more thorough analysis, inclusive of actual cash flow payment dates (we assume annual for our simple analysis), spot risk-free rates (we assume a flat risk-free curve), more dynamic prepayment rates, and other more precise inputs are considered as part of the ADS.
For simplicity we also assume the assets are floating rate senior secured loans, but set at a fixed rate, and have a narrow band of possible recovery rates. The probabilities of default (PDs) are based on the Moody’s idealized default rate table.
The Tables that follow illustrate how the ADS score may shift under different scenarios:
Table 1: Impact of Coupon Rates and Credit Risk Ratings to the ADS
The first part of the analysis (see Table 1) shows the calculated ADS for a group of six stylized loans. The loan coupons range between 5.50%-10.75% (4.50% risk-free rate and risk premiums between 1.00%-6.25%) and have current ratings in the Ba2-Caa1 range. The loans have six-year stated maturities (with 10% constant prepayment rate – CAP) and assumed recovery rates of 45%. Note that for further simplicity we assume the current market values are 100% (or equal to par), and that the stated coupons are such that the current ADS is 1.00 (or ‘fairly valued’ at par).
Table 1 also shows a range of possible ADS scores based on changes to credit risk ratings and coupons. It can also be viewed as changes in the manager’s opinion of credit risk (or PD) associated with the loan. Furthermore, the ADS values can reflect the manager’s opinion on its own fundamental assessment of the loan cashflows (or C-RAV), holding all else constant.
In other words, these ADS values can reflect the manager’s opinion on what the fair value (or price) should be as a percent of par and can be used to compare to what the market price is offering.
Table 1: Impact of Coupon Rates and Credit Risk Ratings to the ADS
Initial noteworthy observations show that investors require compensation via higher coupons that are commensurate with lower rated loans, holding all else equal, such as a larger risk premium for riskier loans.
This can be reflected in the highlighted cells across the loans where the market price clears at par (also reflected with an ADS of 1.00). Notice that for each loan, a change to rating (or PD) impacts the ADS through C-RAV.
For example, if the stylized loan rated B2 were to be upgraded (or downgraded) by +/- 1 subcategory, the ADS value would change from 1.00 to 1.03 (and 0.96) respectively, assuming the market value of the loan remains pegged to 100%.
Table 2: Impact of Prepayment Rates to the ADS
Table 2 displays ADS values after reducing and increasing the CAP rate from 10% to 0% and 20%, respectively.
Table 2: Impact of Prepayment Rates to the ADS
This scenario, of increasing prepayment rates, effectively reduces the asset’s weighted average life expectation, thereby reducing overall coupon cashflows, while also reducing the exposed amount to default, or in other words, prepayments are not subject to loss.
We first notice that those loans with lower ratings (and higher coupons) appear to be the most sensitive to CAP. A lower CAP rate scenario seems to generate more than enough coupon cashflows to compensate for the longer period of exposure to default, such as relatively higher C-RAV and ADS.
In contrast, the higher CAP rate scenario appears to reduce the coupon cashflows enough to lower the ADS (and C-RAV).
Keep in mind that this is an isolated scenario analysis meant for comparison. The outcome can be sensitive to other variable inputs, such as the default timing profile.
Table 3: Impact of Maturity to the ADS
Table 3 displays ADS values after reducing the stated maturity of the loans from 6 years to 5 and 4 years, respectively.
Table 3: Impact of Maturity to the ADS
The stated maturity scenario analysis above shows that it has a similar effect to increasing the CAP rate (see Table 2) thereby drawing a similar conclusion.
Table 4: Impact of Recovery Rate to the ADS
Table 4 displays the sensitivity of ADS values at various recovery rates – from 40% to 50%.
Table 4: Impact of Recovery Rate to the ADS
This scenario analysis impacts the ADS through the loss given default (LGD) expectation of the asset. The table results are clear and intuitive in demonstrating that as recovery rates increase (or, as LGD decreases), the ADS naturally increases.
The extent of the increase appears to be in the range of 1-3 points of incremental ADS as recovery rates increase by 10% (from 40% to 50%). The larger ADS impacts are reserved for the lower-rated, or riskier, assets since the benefit of the higher recovery rates is most pronounced when the probability of default is relatively high.
A tool to navigate the complexities of fixed income portfolio allocation
Fixed income portfolio managers seek to optimize their portfolios to achieve the maximum return with the least amount of risk. However, they face numerous challenges, including market-constraints, investor/lender mandates, and potential regulation.
As managers strive to optimize their portfolios, they often utilize a scoring approach for generating trade ideas. In this paper we presented a framework that can support decision-making for these types of complex portfolio allocation challenges and complement frameworks that may already be in place.
The framework provides a universal score, the ADS, that is easily comparable across all cash-generating assets. The ADS is also simple, robust and controls for critical information, whether it is objective or subjective, relevant to any fixed income investment.
For AD clients, including clients of Solvas and Enterprise Credit & Risk Analytics, the ADS is offered as an additional measure to support our clients with their trade optimization, portfolio allocation, and risk analytics.
Please contact [email protected] for further information on how to access the ADS.
Appendix: Calculation of the Alter Domus Score
The first step to compute the Alter Domus Score (ADS) for any fixed income instrument is to normalize the initial face amount to a value of 1 in the relevant currency. The ADS is then calculated as follows:
Where:
[1]The MV can be adjusted in cases where the manager is subject to certain trading criteria. For example, CLOs commonly carry any loan that was purchased below a certain threshold (or ‘deep-discount’) at the purchase price, which results in a haircut to par in the OC tests. The ADS would effectively be capped (potentially at 1) in this instance.
Angela Summonte will be attending the BAI Private Debt Symposium 2025 in Frankfurt on February 6. Angela is looking forward to connecting with fellow industry leaders, innovators, and investors to connect and discuss the latest trends, opportunities, and challenges in private debt.
If you happen to be at the symposium, don’t miss the chance to connect with Angela in person!
Private debt is in line for a bumper year of deal flow in 2025 as M&A activity rebounds.
Greg Myers
Group Sector Head, Private Debt
Private debt trends in 2025
Private debt is in line for a bumper year of deal flow in 2025 as M&A activity rebounds
Interest rate cuts will squeeze returns a little, but the asset class will continue to present compelling risk-adjusted investment opportunities
Private credit defaults are likely to track higher, but within manageable levels for managers equipped to troubleshoot
Competition for deals will intensify as broadly syndicated loan (BSL) markets continue to rally. Debt funds will have to adapt pricing, but will still benefit from sticking to core strengths
The asset class proved one of the best performers through the cycle of rising inflation and interest rates, with its floating rate structures benefitting from rising base rates at the same time as risk-averse BSL markets pulled up the shutters, opening the way for private debt managers to gain market share and take their pick from the best credits on offer.
These favorable dynamics have shifted in 2024, with central banks cutting rates as inflation subsided and BSL markets bouncing back to record double-digit gains in year-on-year issuance.
Private debt managers will face increasing competition from BSL markets in 2025 as a result, with BSL arrangers and investors showing strong appetite to lean back into M&A and leveraged buyout financings after a stepping back through the period of interest rate dislocation.
The last year has already seen BSL markets claim back market share, offering lower pricing to win back credits that were financed with private debt-backed unitranche loans.
Bank of America figures reported by Bloomberg show that at least US$30 billion worth of private debt deals in the US were refinanced in the BSL market in 2024 at lower rates. BSL players will continue to run hard in 2025 and will not only compete on price. Arrangers, noting the speed of execution and certainty offered by private debt providers, have worked hard to get BSL pricing spot on to avoid flex and mitigate syndication risk.
For deep dives into key trends driving the 2025 private debt outlook, read on.
Pricing pressure for private debt investment targets
Increased competition will keep private debt managers on their toes, but the asset class is still well placed for a strong year of activity and opportunity in 2025.
Managers will have to accept that they may have reduce margins to stay within a reasonable range of the pricing banks and BSL markets can offer in the year ahead. Many have already done so.
But while margins may have to come down, and interest rates are lower, private debt managers will still be able to deliver consistent, high single digit returns, as base rates remain well above levels from 24 months ago. On a risk-adjusted basis, private debt will continue to appeal to investors, even if returns are slightly lower than those delivered in 2024.
Lower returns, however, will be more than made up for if a much-anticipated uptick in M&A activity is realized in 2025. Interest rate stability and the urgent requirement for private equity dealmakers to make distributions to LPs promises to deliver a meaningful uptick in deal volume and demand for private debt financing.
Private debt players have also proven their ability to finance large credits through the period of interest rate rises. BSL markets may be open again, but private debt managers now have a track record of clubbing together to deliver financing for massive credits that not too long ago would have been the exclusive preserve of BSL markets.
Recently, for example, a club private credit managers teamed up to provide a £1.7 billion loan to help finance the take private of UK investment platform Hargreaves Lansdown. BSL markets will entice borrowers with lower pricing in 2025, but large credits will no longer default to BSL markets, as private debt managers show that they have the scale and appetite to offer flexibility and certainty of execution on big credits.
Dealing with private debt defaults
A rise in deal financings, however, will not be the only thing taking up private debt manager time in 2025. Portfolio management will remain a key priority, as managers move to protect value and limit losses.
Private debt portfolios have proven resilient through a period of rising rates, and while defaults are expected to increase in 2025 as the impact of rising rates trickles down to borrower balance sheets, overall default levels should, all being well, remain within manageable thresholds.
An uptick in defaults, however, will see a bifurcation in the market between managers with the capability and resources to steward credits through periods of stress and distress, and those that have strong transactional capabilities but haven’t made the investment in restructuring capability. This will become especially apparent in a market where defaults track higher at the same time as new financing deal volumes start to rally. Managers with lean teams will find it increasingly difficult to keep on top of new opportunities and keep troubled credits on track.
A good time to be in private debt
The next year might not be quite as good for private credit debt as 2023 and 2024, but the asset class is still set for a good 2025.
Winning deals will take more work as competition increases, and margins and returns will have to be adjusted accordingly for private debt to remain competitive in a market where other financing channels are beginning to function normally once again.
There will, however, be more deals to go for if M&A activity rebounds as expected, which should balance out the challenges posed by rising competition and tighter margins and returns.
The private debt “golden era” may have run its course, but private debt is an asset class that looks likely to retain is luster for some time yet.
Alter Domus cements connections across the Philippines and Asia with a new office in Manila.
Luxembourg and Manila, Philippines, December 12, 2024 – Alter Domus, a leading provider of tech-enabled fund administration, private debt, and corporate services for the alternative investment industry, today announced the opening of its new office located in Bonifacio Global City (BGC), Taguig, the Philippines. This strategic new location in Manila’s growing business hub underscores Alter Domus’s dedication to better serving its clients, improving access to its world-class fund administration services and facilitating collaboration with private markets firms.
The Manila office occupies a full floor of the state-of-the-art workplace located in the Ecoprime building in BGC. Over 100 employees are currently based in Manila, and Alter Domus aims to nearly double its workforce in the city by 2025. The firm is actively recruiting finance and accounting professionals to support this expansion. The office marks Alter Domus’ 39th global location and follows the launch of Alter Domus India earlier in 2024, expanding the organization’s footprint in the Asia Pacific region to 12 offices across seven jurisdictions.
I am thrilled to announce the opening of our vibrant Manila office and celebrate this milestone with our Alter Domus Philippines team. Establishing our presence in BGC enables us to better connect with our clients, strengthen our private markets services and technology and further expand our global reach.
Sandra Legrand, Regional Executive for Europe & Asia Pacific, Alter Domus
About Alter Domus
Alter Domus is a leading provider of tech-enabled fund administration, private debt, and corporate services for the alternative investment industry with more than 5,500 employees across 39 offices globally. Solely dedicated to alternatives, Alter Domus offers fund administration, corporate services, depositary services, capital administration, transfer pricing, domiciliation, management company services, loan administration, agency services, trade settlement and CLO manager services.
Michael Janiszewski shared his insights in December’s PEI Perspectives report about what tools, technologies and support GPs and LPs will need to set them up for 2025.
Michael Janiszewski
Chief Operating Officer
December 5, 2024
Interview
How important is a manager’s operating model to its fundraising success in today’s market? To what extent has this changed and why?
Private markets assets under management have more than trebled to $14.5 trillion over the past decade, according to analysis by Bain & Co. In a climate of increased competition, LPs are placing a growing emphasis on private markets firms’ operating models.
This is in part because LPs have substantially larger pools of capital invested in private markets today. As a result of these larger exposures, they are leaning towards managers with robust operating models in order to limit the downside risk.
At the same time, managers with best-in-class operating infrastructure are better positioned to collect, analyze and harness data to improve deal origination, execution and portfolio company performance. Of course, dealmaking will always remain the core priority for managers, but GPs have come to realize that back-office capabilities and operating models can contribute to front-office success and play an important role in supporting future fundraising.
What areas are LPs scrutinizing in particular? What are the must haves and the red flags for investors doing their due diligence on operating models prior to committing to a fund?
Investors are certainly demanding more when it comes to reporting, compliance and technology. Having the right bespoke operating model in place puts GPs in a better position to differentiate their firms through speedier, more detailed, value-add reporting to investors. In addition, LPs are looking to interact with their GPs in a more digital and data-driven manner, gaining access to information about investments in new and deeper ways.
As well as supporting fundraising, how else can fit-for-purpose, future-proofed back-office infrastructure support front-office activities?
A rigorous back-office capability is essential for GPs who want to offer more co-investment opportunities, take advantage of the liquidity offered through NAV financing, or are considering GP led deals that require solid accounting and reporting frameworks. These are all inherently data-driven activities, which means that the way in which they will ultimately be delivered will be through the use of technology.
What role is technology playing in supporting the modern private equity operating model more generally, and what opportunities does this present?
Technology is undoubtedly playing an ever more important role across the private equity industry. This initially played out in the back office, with various types of financial statement reporting, cash management solutions, as well as workflow and case management tools coming to the fore. Then, in the middle office, we started to see a focus on fund performance and portfolio monitoring, with information being collected across asset classes to support risk management and sophisticated reporting.
Finally, in the front office, technology is now being used to support investment and diligence processes, as well as investor relations. What I think is particularly new and exciting is the proliferation of specialist private markets tools that we are able to leverage today. This is in complete contrast to what was available a decade ago.
It used to be that if an alternatives manager was looking at an aircraft lease, for example, we would have to adapt that into the fund accounting system in the form of some sort of bond. That is no longer the case. Technology now has the language of alternative investing built into it, enabling us to provide different views on risk, better access to data to support superior decision making, and allowing LPs to actively monitor their investments.
The other area where we are seeing significant changes, and where development is primarily driven by LPs, is an enhanced digital experience. It’s still early days, but we are seeing generative AI being used to answer client queries, to leverage large knowledge bases and to respond to requests for proposals. Then, from an operational perspective, optical character recognition is being widely used to make tasks that were historically manual more automated.
Looking ahead, I cannot think of a single operational function where we won’t be using some sort of AI to either extract or manage information differently, or to start drawing conclusions based on that information to support reporting or decision-making, at some point in time.
However, the focus should not just be on AI, but automated machine learning as a whole the process of taking upstream and downstream data and standardising it – given the sheer volumes of financial documents that come into play.
To what extent is artificial intelligence being integrated into digital solutions?
Technology is being used to create great UI, visualization and mobile access, for example. A wide variety of digital interactions – from something as simple as getting a K-1 in the US to performance analysis, cashflow fore[1]casting and benchmarking – have all become, if not the norm, then certainly the expectation for investors. Alternatives have become a much more digital and data-driven industry.
Is the rapid adoption of technology also creating challenges?
I would say the biggest challenge for managers involves data management. While we have made great strides in systems that speak the language of alternatives, we are nonetheless faced with significantly increased demands from clients – both GPs and LPs – when it comes to managing that data. Of course, the cloud has helped us a great deal in that regard, but there is still a lot of hard work involved in operationalizing data that has historically been manually inputted into spreadsheets. Finding ways to ensure that data can be accessed and analyzed in sophisticated ways is something that will certainly be enabled by technology, but there is still some way to go.
The service that an administrator provides reflects directly on the manager. It is a reputational issue for GPs, and therefore for LPs too. LPs are looking to interact with their GPs in a more digital and data-driven manner.
How are all of these developments impacting the decisions that managers are making around what to outsource and what to keep inhouse, and how are third-party providers responding?
Rather than investing large amounts of capital into ever-expanding back-office teams and technology, managers are increasingly working with third-party administrators in order to benefit from the scale, cost advantages and specialized back-office focus. This enables managers to instead invest capex into their core business of dealmaking. In response, fund administrators are evolving their offering from the provision of basic outsourced fund accounting services to providing technology best practices, together with support for managers to enable effective implementation and harness technology in modular operational models.
What is particularly exciting for us is that we are receiving a lot of inbound interest regarding solutions to many of the challenges that I have described. Those enquiries sometimes center on the use of data to support better investment decision-making, for example, or the need to provide different types of information to end clients.
The focus can also be on improving the manager’s cost profile. In short, managers are looking to third parties to fulfil functions that they either can’t or don’t want to invest in at the level that an external provider can. Another driver, meanwhile, is the desire from managers to partner with organizations that are able to glean insight and experience from working with market participants across the entire industry.
As a result, third-party administrators are being approached not only as outsourced service providers but as accelerators for the strategies that their clients are trying to implement.
Is the choice simply between insourcing and outsourcing, or are other models emerging?
Co-sourcing is certainly a trend. That is something that managers are talking to us about and it is something that we have the flexibility to implement. However, I would add that most of those conversations are followed by questions about what our plans are as a third-party administrator to provide some of those functions in a fully out[1]sourced manner.
Co-sourcing is typically seen as a step on the journey towards outsourcing.
What questions should LPs be asking of a potential outsourced provider?
Operational excellence is, of course, incredibly important in this space, because the service that an administrator provides reflects directly on the manager. It is a reputational issue for GPs, and therefore for LPs too. Other sources of differentiation among third-party providers include the degree to which these organizations are investing in their own core systems and operations in order to take advantage of industry trends. GPs should also select an expert partner with firsthand experience in managing processes across multiple strategies and different investment vehicles.
An understanding of cross-jurisdictional knowledge is also vital, should they wish to expand investment beyond their regional boundaries. In addition, LPs should consider the extent to which administrators are investing ahead of the curve, thinking about the next wave of innovation, whether that be generative AI, sophisticated data management or the provision of different ways for LPs to access information.
That kind of forward-thinking approach can help put managers on the front foot when fund[1]raising, and give LPs the comfort that operations are being well run by experienced industry specialists, and that it can scale as their firm grows.
What is your number one piece of advice for a manager re-evaluating its existing operating model with the intention of building something that is sustainable and that will allow it to scale?
My number one piece of advice would be to take time to review the market. I would add that it is also important to understand that the role of the fund administrator has changed.
Today, the right outsourced partner can provide operational support from back-office accounting, all the way through to client services, thereby enabling firms to focus on their own value proposition in a very different and much more sophisticated way.
The team is heading to Dana Point, CA for Opal’s CLO Summit! We always look forward to this event, it’s an industry highlight.
This leading event provides the most up-to-date information for maximizing returns and deducting risks in the rapidly changing asset field. Get in touch if you’re there!
Key contacts
Lora Peloquin
United States
Managing Director, Sales, North America
Randall Reider
North America
Managing Director, Sales, North America
Tim Ruxton
United States
Managing Director, Sales, North America
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EventsJanuary 22, 2025
The 21st Annual Winter Forum on Real Estate Opportunity & Private Fund Investing
Acing loan agency: What to look for in an administrative loan agent
As private debt managers’ operations grow in complexity, outsourcing more of the administration burden to a loan agent offers the opportunity to streamline middle office duties.
Pete Himes
Head of Debt Capital Market Products
November 12, 2024
Private debt has encountered explosive growth as an asset class in recent years. The industry started out 2024 with $1.5 trillion in assets under management, up from $1 trillion in 2022, according to Morgan Stanley.
As direct lenders and broadly syndicated loan managers seek to grow their funds and returns alongside this industry growth and investor demand, the burden of their fund operations can begin to have an effect on their success.
This is especially the case with loan agency operations, known for their intense level of work across complex credit investments at high quantities.
Under these industry conditions, using a loan agent becomes much more appealing for many managers, and firms who already depend on a third-party loan agent may look to increase their outsourcing or select a new provider that more closely meets their needs.
To understand more about loan agency and how a good loan agent operates, read on.
What is a loan agent?
In the credit and private debt space, a loan agent is the party that facilitates all ongoing operations required to adhere to the loan terms and liaises between the lenders and counterparties to do so. Tasks that are central to loan agency include:
Calculating a loan’s interest over time
Coordinating loan and interest payments between multiple lenders and counterparties
Sending loan communications between lenders and counterparties
Engaging outside parties like lawyers or fund administrators to move along loan operations
There are a few different kinds of loan agents depending on a lender’s needs or depending on the nature of the loan:
Administrative agent
A lead administrative agent, or a named agent, fully represents the lender on the loan and is named in documents as the administrative agent. By taking this lead administrative agent role, the partner takes over all loan agent responsibilities from the lender.
Sub agent
The sub agent role exists for lenders who want to take the lead role in the loan agency process and be listed as the lead agent on their own deals. For the behind-the-scenes responsibilities that they hope to outsource, they would work with a sub agent who is not named on the loan but handles elements such as payment distribution and managing interest rates.
Successor agent
A successor agent steps in when the administrative agent resigns or is replaced, a situation that frequently arises in restructuring scenarios and liability management exercises (LMEs). This change can disrupt the smooth administration of a credit facility and potentially delay the LME or restructuring process. Acting as a neutral third party, the successor agent ensures a seamless transition, aligning the goals of all involved parties and facilitating a the swift progression of the constituents’ objectives and desired outcomes. At Alter Domus, we’ve served as successor agent on many high-profile LME and restructuring deals such as Amsurg, Apex Tool, Boardriders, Brightspeed, Revlon, Trinseo, and Wheel Pros, among many others.
What to look for in a loan agent
While lenders can insource loan agency responsibilities, many choose to outsource some or all of this imperative, labor-intensive fund operation. By outsourcing these responsibilities to a loan agent, lenders benefit from tighter headcount in their operational teams and the close attention and expertise of teams specifically focused on all aspects of the loan agency process.
But not all loan agents are created equal. Loan agency involves painstaking and bespoke work to carry out the terms of a loan over the multiple years of its life. When evaluating partners to serve as a loan agent, here are some key elements to help decide if they’re up for the task:
A balance of bespoke expertise and ability to scale operations
As the direct lending and BSL spaces grow and managers hone their strategies along with that growth, more complex loan terms and transactions emerge. It’s encouraging to see our industry mature in this way, but it does make for more complex fund operations, particularly on the loan agency side.
For a loan agent to work effectively, they need to have direct and deep expertise in these bespoke strategies and debt vehicles. At Alter Domus, we pride ourselves in operating at the intersection of bespoke expertise and high volume. Our servicing teams are segmented out by asset class expertise and work cohesively for an end-to-end approach, as opposed to the siloed operations of our competitors. We have the experience and the team size to achieve the balance needed for fickle loan agency challenges.
Technology-enabled service
Loan agency services may take plenty of time, attention, and expertise from your provider, but it’s also crucial that your provider has capable technology underpinning their loan agent duties. When a provider relies too much on manual processes in administering loan agency, their lender client absorbs the high risk of error.
At Alter Domus our loan agency teams rely on our proprietary software platform Agency360 to service our direct lender and BSL clients. There are key benefits to relying on a proprietary tool for these needs. For example, we control the updates and maintenance of the tool ourselves rather than relying on software from a third party. We also avoid having to pass along rising fees from a third-party platform.
A reliance on powerful technology should also extend to the client experience. When outsourcing loan agency operations, lenders should still have a view into the service they’re receiving and a 24/7 ability to access their loan data and reporting. A third-party loan agent should offer a tech-enabled and convenient way to check in on their operations and download relevant reporting.
At Alter Domus, we offer Agency CorPro as a home base for our clients. The proprietary portal platform serves as our purpose-built solution to exchange sensitive asset information and important loan documentation between our teams. That means our work is available to you at all times in a self-service fashion.
Breadth of loan agency and other middle and back-office service capabilities
An ideal loan agent should offer additional services throughout the loan lifecycle to support your operations. By placing multiple outsourced needs with the same firm, your teams can benefit from a more holistic data and technology experience.
Optimize your loan agency operations with Alter Domus Agency Services
As a top provider in the market, Alter Domus’ Agency Services offering meets all these needs and more. Our servicing teams are trained specifically in bespoke credit vehicles and are large and experienced enough to handle high volumes of loans. In fact, our peak seasons see us processing more than 100,000 payments in a single day.
Ready to see what Alter Domus can do for your loan agency needs and beyond? Learn more about Alter Domus’ Agency Services here. To speak with our Agency Services team about how our services can help your middle- and back-office operations, contact us here.
