From 8-9 November, our very own Angela Summonte will be attending ALFI’s Roadshow to Switzerland, taking place in both Zurich and Geneva. The event will cover key subjects concerning both the Luxembourg and Swiss fund communities, including hot topics like AIFMD and UCITSD. Be sure to contact Angela in advance if you’ll also be attending!
Key contacts
Angela Summonte
Luxembourg
Group Director, Key Accounts
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5 things you can do now to prepare for the new SEC regulations
When the SEC voted on August 23rd this year to adopt and finalize new rules and amendments under the Investment Advisers Act of 1940 (the “Advisers Act”), the full implications for private fund managers crystalized. With these wide-ranging measures starting to come into effect any day now, the timeline to comply means you cannot afford to be complacent.
Here are some key areas of the Final Rules that each private fund advisor will be responsible for, regardless of whether they are registered with the SEC or not:
Quarterly Statement Rule 211(h)(1)-2
Audit Rule 206(4)-10
Compliance Rule 206(4)-7(b)
Adviser-Led Secondaries Rule 211(h)(2)-1
Preferential Treatment Rule 211(h)(2)-2
Restricted Activities Rule 211(h)(2)-3
With these rules in mind, here are five key things private fund advisors should be considering and preparing for now:
Become familiar with the required updates needed for private fund quarterly and annual audit reporting including required issuance dates, governing documents, policies, and procedures.
Consider any grandfathering clauses that may affect your requirements under the Restricted Activities Rule and Preferential Treatment Rule with respect to already existing agreements.
Start to work through how to incorporate additional transparency around private fund fees and expenses, including calculations and cross-reference to organizational documents, performance, and potential conflicts of interest.
Review preferential treatments currently in place for certain investors in a private fund or a similar pool of assets and become familiar with the disclosure requirements, or cessation, of the same, for current and prospective investors.
Assess the adoption dates for the new rules.
No one-size-fits-all approach
The nature and complexity of these reforms mean that firms need to take a proactive and individual approach to their compliance – there is no cookie-cutter solution.
With that in mind, here at Alter Domus, we are cognizant of the amount time and collaboration our clients will require across their own organization and across third party service providers, like ourselves.
The new requirements will have significant impacts on the timing and level of detail and disclosures required for quarterly and annual financial reporting, and as such, please get in touch with us to discuss our plans for preparation. Contact us below.
AI & Alternatives case study: Consolidating files into a NAV dashboard
We at Alter Domus are regularly approached by our key clients to help them solve some unique business challenges. As both our expertise and investment technology have grown significantly, we have increasingly begun to utilize artificial intelligence as a central mechanism to find and deliver solutions to our clients. This is the first in a series of case studies designed to highlight the multiple ways we are creating impactful, customer-centric technology for alternative markets.
Davendra Patel
Head of AI & Automation
The challenge
Getting a clear picture of your net asset value, or “NAV” as it’s known, is a crucial calculation for every investment company. Essentially, a company’s NAV is its total assets minus its total liabilities, and as the number of funds and assets accumulate, the task of calculating this becomes ever more arduous – especially when using legacy tools such as Excel. We were approached by one of our key clients to see if we could create a solution to this labor-intensive task.
Their team faced the challenge of having to manually consolidate up to 11 Excel files to create one final NAV dashboard for each of their funds. What is of course crucial is that as the volume of data and manual work increases, the greater the possibility for data inaccuracies and calculation errors. On average, this entire process took days for their team to complete.
The solution
To address this challenge, the team proposed and designed a solution that involves the user uploading the 11 Excel files, including trial balances, bank balances, and FX rates, into a tool that consolidates them into a single NAV dashboard. Once the consolidation is complete, the user receives an email containing the new dashboard.
How the process and AI bot works (per each fund)
STEP 1:
Alter Domus team logs into the Web Apps Portal and runs our NAV tool
STEP 2:
Alter Domus team uploads the 11 Excel sheets received from client, including:
Trail balance, bank balance, collateral abacus & eFront
FX rates, loan & credit facilities, accruals listing
Loan request, ICAS previous & current period, hedging
STEP 3:
Bot opens each Excel sheet. It copies and pastes, and completes lookups from the column data in the various spreadsheets
Bot cleans data where required
STEP 4:
Significant reduction of the time and effort required by client’s team to complete this task: what once took days now takes minutes
Enhanced data and calculation accuracy
Client’s team is freed up to focus on less manually intensive, more strategic tasks
The bot is able to handle increasing volumes of this work, eliminating the need for the client to hire additional staff or reallocate internal resources
Implementation time
2 months to develop the bot
1 month in UAT
1 month in control production
Contact us today to find out how you, too, could benefit from our use of artificial intelligence in delivering impactful technology solutions.
Returns from SuperReturn: fund domicile decisions, regulatory uncertainty, and the driving hand of technology
The dust has settled on SuperReturn, the conference at which the world’s leading asset managers, investors and fund administrators gather annually to opine on the state of the industry. Now back from both hosting and attending panel sessions and giving keynote speeches in Amsterdam, Alter Domus leading lights Bruno Bagnouls, Patrick McCullagh and Tim Trott outlined some of the key themes and discussion points from the event in an Alter Domus roundtable interview.
Bruno Bagnouls: Gentlemen, that was an intense three days of debate and discussion at SuperReturn and alternative markets seem set for an interesting ride in 2024. Tim, let’s start with you. Here at Alter Domus it’s vital that, as a leading fund administrator, we keep a watchful eye on what’s happening on the regulatory front. You attended one of the lead sessions on this topic – what were your big takeaways?
Tim Trott: Well, we live in a time of constantly shifting sands on the regulatory front, and there were several issues that are generating some market apprehension and uncertainty. Firstly, Article 8 of the Sustainable Finance Regulation Disclosure mandate. Now, Article 8 refers to funds promoting environmental and social objectives which take more into account than just sustainability risks as required by Article 6. However, part of the issue is that Article 8 funds don’t have ESG objectives or core objectives. And there is market concern that this lack of backbone to the regulation and with SFDR could lead to what’s referred to as greenwashing on top of generating extra costs for that fund.
Secondly, on the challenging acronyms front, the incoming Alternative Investment Fund Managers Directive 2 was discussed as you’d expect. Otherwise known as AIFMD II, it was highlighted how AIFMD II’s control of cross-border marketing for funds is squeezing mid-market managers out of Europe, disincentivizing new players and, at the very least, increasing the administrative burden for market participants.
Bruno: Broadly speaking, Tim, ESG considerations do look set to become an ever more intrinsic part of raising, investing, and administering capital as time moves on. Moving on, Patrick, we listened in to the rather lively panel session on choosing a home to domicile your fund – what were the main insights?
Patrick McCullagh: This is, quite understandably, always a hot-button topic in the industry, Bruno. To stretch the metaphor, whether your fund is a bungalow or a palace, where you lay the foundations can make a huge difference. Key points to note were that from a jurisdictional perspective, Luxembourg remains an incredibly attractive EU option, not only for tax reasons, but because it has the largest cross-border funds distribution. It does also seem that Brexit has been somewhat of a boon for Lux, with more fund business migrating there. On the downside, issues were raised around appropriate infrastructure investment regarding banks and law firms, with Guernsey being flagged as comparatively better equipped in this area. Elsewhere in Europe, Switzerland was highlighted as a challenging place to domicile.
Beyond the EU, we have all of course been following the fall-out from the ‘black-listing’ of the Caymans, and how this has also pushed some US players towards Lux. That said, the panel outlined that for most, the risks associated with the Caymans are acceptable. Investors are still comfortable with the familiar and see the black-listing as likely to be short-term. There are also a lot of investment strategies that involve certain risk thresholds in industry or jurisdictions, especially emerging markets where other well documented risks make it almost irrelevant.
Bruno: And of course, many of these issues highlight just why it’s important to have fund administrators that have both local and cross jurisdictional expertise. Sticking with funds, Tim, day two of SuperReturn kicked off a look at fundraising trends. What was the general sentiment?
Tim: There are some clear challenges in this area, Bruno. While Covid was obviously terrible for the planet at large, fundraising was generally easier in that period. In this current period, fundraising is taking a lot longer, partly I’m sure because of the ongoing uncertainty that high interest rates and inflation caused. However, funds are both getting bigger generally with fewer smaller players entering the market. No matter their complexity, investors certainly aren’t being turned away at the door as that need for capital is swelling.
Patrick: Just to add to more weight to Tim’s point there, I attended a session on the evolving role of CFOs and it was acknowledged that fundraising would continue to be trickier for the foreseeable future.
Tim: Industry data and insights company Preqin also hosted an outlook session on alternative markets and they forecast growth to slow globally in terms of assets under management, as well as highlighting an apparent disconnect between fund targets and actual funds. It’ll be interesting to see what happens when shifts start occurring at the macro-economic level.
Shifting from fundraising to existing funds, one other point that jumped out at me at the CFO session was the comment that the implementation of IT and digitalization in general being much harder for larger or more vintage funds.
Bruno: Tim, that’s a nice segue into the fact that Patrick hosted a ‘Let’s talk tech’ panel at the event. Investment in and use of technology seems to be in everyone’s minds and plans right now.
Patrick: 100% right, Bruno. I’d say that we really are now at the beginning of what we at Alter Domus would call the third generation of fund operations, with technology coming to fore. Automation, AI and machine learning are certainly going to have a somewhat seismic impact on the industry, as will the end-to-end digitization of workflows.
From a back-office perspective, it doesn’t matter if it’s data collection, data processing, or data distribution, the days of throwing ever larger number of bodies at a problem – and using blunt, legacy tools like Excel – are going the way of the Dodo. It always comes back to a question of scale: the ability to grow your business, grow the number of funds and accurately administer that fund, monitor that fund’s performance, and derive investment insight from that fund data is increasingly going to come down to the smart integration and application of best-in-class technologies. Everyone on my panel agreed that standardized, comparable, accurate data that can be swiftly deployed downstream to the analytical arms of a business is vital.
Tim: Of course, the other factor driving this is the increasing demands of investors. Their reporting demands are growing, as is their need to understand the infrastructure of an asset management house being the third parties that they engage with and technology solutions used throughout the structure before they consider partnering.
Patrick: Absolutely. And this is also where administrators like Alter Domus are taking a leading role in the development of new technologies for fund administration, data extraction, portfolio monitoring and beyond. This helps insulate managers from steep tech development costs, risks, the time to market needed to do it themselves, or to retro fit new technology to ‘legacy’ operations. The future really is now.
A game-changer for fund managers and Alter Domus: The benefits of AI and machine learning
Artificial intelligence and machine learning have the potential to be game changers for private credit and fund administrators. Alter Domus’ Head of Automation and AI, Davendra Patel told PDI’s “Future of Private Debt” report, boosting everything from deal sourcing to ESG reporting.
Davendra Patel
Head of AI and Automation
Although early adopters are seeing the benefits of integrating artificial intelligence and machine learning into their fund management workflows, the game-changing potential of the tools remains largely untapped in private credit — but probably not for long, according to experts who spoke recently with PDI for their recently published “Future of Private Debt” report.
The group included Davendra Patel, Head of Automation and AI at Alter Domus.
The sector is gradually embracing AI and machine learning for good reason: the technology can help with investment strategy and back- and middle-office functions alike, everything from deal sourcing and due diligence to investor and ESG reporting.
One of AI’s strengths is its ability to discern patterns from thousands of data points, and to do it in a fraction of the time it would take a team of people to do it, and without the risk of human bias. Of course, it takes human judgment to draw a final, well-considered decision out of the data, but AI can improve the confidence around it.
Alter Domus spent four years creating its own AI systems, including a proprietary version of ChatGPT. According to Patel, the company’s in-house capabilities, which have been deployed across Alter Domus’ entire business, help clients simplify and automate complex processes.
Among other things, Alter Domus automation reads emails, removes attachments, and automatically classifies, extracts, and summarizes the information. Clients have access to real time insights — something investors have been clamoring for. What’s more, Alter Domus’ proprietary tools mitigate the security risks often associated with off-the-shelf digital solutions.
Uncover the latest trends and developments in the securitization industry by joining our team at IMN’s ABS EAST Conference in Miami from October 23-25. Our team looks forward to meeting you at the Alter Domus sponsored conference to discuss leveraged loan and CLO markets, non-bank lending, ESG frameworks, and many other topics shaping structured finance. Our attendees include:
Tom Gandolfo
Kennedy Glasscock
Greg Myers
David Traverso
Randy Reider
Tim Ruxton
Lora Peloquin
Attend the conference to gain exclusive insights from Tim Ruxton and Greg Myers during their panel sessions.
Greg Myers will be moderating the “CLO Manager Perspectives” panel on October 24th at 4PM EST, while Tim Ruxton will speak on the “Leveraged Loan Market” panel on October 23 at 2PM EST.
Be sure to connect with our team ahead of the conference to learn more about Alter Domus’ range of structured finance solutions.
Key contacts
Tom Gandolfo
United States
Head of Sales & Relationship Management North America
Lora Peloquin
United States
Managing Director, Sales, North America
Greg Myers
United States
Global Sector Head, Debt Capital Markets
Tim Ruxton
United States
Managing Director, Sales, North America
Randall Reider
North America
Managing Director, Sales, North America
David Traverso
North America
Managing Director, Sales at Alter Domus North America
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Managing security risks allows fund executives to take advantage of AI opportunities
Davendra Patel
Head of AI and Automation
Considering the transformational possibilities of artificial intelligence on fund operations —the right applications can do everything from reduce costs to help generate new revenue — it may come as a surprise that only 14% of fund executives surveyed by information service Private Funds CFOhave implemented AI technology into their portfolio companies. Perhaps more startling is that more than half of respondents said they had no plans to adopt AI in the next year.
For Alter Domus Head of AI and Automation Davendra Patel, that looks like a missed opportunity, especially with areas such as risk management, due diligence, and performance tracking ripe for AI integration.
In a recent interview with Private Funds CFO, Patel said that in the current economic climate, AI is a pivotal tool for gaining a competitive advantage. That’s a view his own company has taken to heart: Alter Domus has created its own versions of ChatGPT and integrated generative AI to automate data from various sources, providing real-time information and insights to clients.
Patel, who has 30 years of experience in IT, acknowledges the potential security risks around AI, including the threat of shared information becoming leaked information. By developing proprietary tools, Alter Domus has optimized data safety. In addition, in-house experts continuously monitor the Alter Domus system for vulnerabilities and breaches.
“We focus on regular reviews, audits, and ethical considerations to ensure AI’s responsible and safe deployment,” Patel told Private Funds CFO.
“It’s essential to balance AI’s potential with practicality, focusing on both immediate gains and long-term benefits.”
After more than 36 years of existence, the London Interbank Offered Rate (LIBOR) was discontinued in July 2023 in favor of alternative references rates, such as SOFR (Secured Overnight Financing Rate). As mentioned in previous Alter Domus reports, we discussed the need to migrate away from LIBOR and provided updates on the transition as the cessation date grew closer.
Now that LIBOR is no longer published, we report on the impact it continues to have, albeit declining, in the U.S private debt market and address any lingering considerations.
Announcement of LIBOR’s future discontinuation in 2017 posed an intimidating feat, like an impending storm, as LIBOR was pegged to almost all contracts accounting for billions of dollars of debt. Six years later, though, market participants made it through the storm quite successfully.
Overall, the LIBOR transition was, as the AARC[1] puts it, “smooth and uneventful.”[2] Much of the success is attributed to the careful planning and coordination between agents, like Alter Domus. borrowers, lenders and financial regulators.
Moreover, as the June 30,2023 deadline approached, there was a predictable uptick in credit agreement amendments and triggering of existing ones. As reported by the LevFin Insights, amendments spiked in June, nearly totaling 300, representing almost 3 times the amount of amendments in May and April[3].
The same can be inferred with respect to the direct lending space, as we turn to publicly available BDC (Business Development Companies) data as a proxy. From a sample of 13 BDC’s registered with the SEC, representing over $33bn in portfolio valuations or about a quarter of the publicly traded BDC market, we observe from the 2023Q2 SEC filings that the average decrease in loans tied to LIBOR jumped to 27% during 2023Q2 from 10% in 2023Q1.
The graph and table that follow clearly illustrate the declining relevance of LIBOR and rising relevance of SOFR in the last four quarters – with SOFR beginning to equal and surpass LIBOR in Q1’23. Over the past 9 months, SOFR-pegged loans have gone from 28.5% of total floating loans to 75% for the loans in the underlying sample portfolios.
LIBOR Declines While SOFR Grows (sample of 13 BDCs)
Count of Floating-Rate Investments – Sample of 13 BDCs over the past 4 quarters
Base Rate
Q3’22
Q4’22
Q1’23
Q2’23
LIBOR-based floaters
1,232
1,117
986
454
Non-LIBOR-based floaters
550
769
1,005
1,555
Total Floaters
1,782
1,886
1,991
2,009
LIBOR as a % of Total Floaters
69.1%
59.2%
49.5%
22.6%
SOFR-based floaters
507
715
942
1507
SOFR as a % of Non-LIBOR
92.2%
93.0%
93.7%
96.9%
SOFR as % of Total Floaters
28.5%
37.9%
47.3%
75.0%
We’ve currently discussed the recent increased migration efforts that led to a successful migration away from LIBOR, but does that mean all loans refer to an alternative rate? Not quite. Currently, in the same BDC sample as of the end of 2023Q2, 75% of loans reference SOFR.
With regards to the leveraged loans and the CLO market, the results are similar, as 76% of loans reference SOFR (as of August), per LSTA.[4] The reason why these numbers are not 100% is due to contracts that were opened prior to the June 30,2023 deadline that still refer to a LIBOR reference rate.
Since most contracts are 3-months, we should expect to see a considerable amount of loans automatically migrating to SOFR (via the LIBOR act or through the triggering of an amendment). We will continue to track this migration as it nears completion.
Overall, it appears that the transition has gone quite smoothly, thanks to years of thoughtful preparation. Loans that are currently tied to LIBOR will eventually point to an alternative rate once the contracts next renew – post June 30.
The AARC, which was tasked to determine the proper alternative rates to transition to, will slowly[5] wind down its work, emphasizing that the SOFR should be deemed the best option as the alternative rate given its robust tie to the transaction-heavy treasury market.
Going forward, we will keep readers updated on the status of the remaining loans that still reference LIBOR and hope to look past the migration with a greater sense of triumph.
Value-creating operations teams must be built on quality, not quantity
Steve Krieger explores emerging managers’ challenges when developing portfolio operations teams from scratch while simultaneously fundraising and sourcing deals.
Steve Krieger
Head of Key Client Partnerships
We understand that for first-time funds and emerging managers in particular, developing a portfolio operations team from scratch, while simultaneously fundraising, sourcing deals and facing into macro-economic headwinds, is a big challenge.
The latest ‘Operational Excellence’ report from PEI explores how businesses are meeting this challenge; including hiring experienced value-creation professionals, innovating around existing value-creation levers and using new technologies and finally working with the right partners to access specialist functional or industry expertise.
Steve Krieger, our Head of Key Client Partnerships, delves into the importance of quality over quantity and how working with the right partners can create a truly value-creating operations team from day one.
He contends that:
Businesses need a handful of highly knowledgable and well-connected individuals in-house, who can build relationships and work well with management teams
A small group of experienced individuals pulling their sleeves up and getting things done is far more valuable to companies than dozens of people that are giving out theoretical instructions
There is a fine line between being helpful and being intrusive, so individuals working in portfolio operations need to have that sensitivity
Ultimately it is not about being the person in the room that has the best idea but being the person with the best idea that actually gets done
Contact Steve to hear more about our operations expertise and you can access the broader PEI “Operational Excellence” report here.
We’re proudly sponsoring the 9th International Funds Summit & Expo in Cyprus on October 23 and 24.
The summit brings together investment fund professionals from around the world to discuss the evolving regulatory and increasingly competitive landscape in the global asset management sector and much more.
On Day 2, Evdokia will moderate the panel discussion “The Future of Funds Administration”, where experts will explore how the future of fund administration is posing unique regulatory challenges, especially in smaller jurisdictions.
Meet our team at our Alter Domus booth and discover how our solutions can meet your needs.