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Addressing the data challenge in the decade ahead

As complexity increases in the asset class, so do the demands of investors and regulators, placing new pressures on fund managers, say Alter Domus’s Greg Myers and AEA’s Andrew Kyung


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How have the issues facing private credit managers evolved in the past decade?

Andrew Kyung: The private credit asset class has seen significant growth over the last 10 years. The challenges for managers have become more com­plex in a variety of different ways. In addition to rapidly increasing interest rates, there have been notable increases in tax and reporting regulations and the general information needs of investors.

Greg Myers: Private credit managers comprise a much larger proportion of corporate lending and M&A lending compared with 10 years ago. As banks retrench, direct lenders are among the first group of people contacted when there is a big deal or borrowing require­ment from corporate institutions. Com­petition for those deals has increased and there is now an almost institutional expectation from borrowers that wasn’t there in the past when these funds were regarded as opportunistic lenders.

Now, the expectation is of a formal­ised infrastructure on a par with what borrowers would see from a large bank­ing institution, placing pressure on cred­it managers that did not exist a decade ago to build out the requisite platform to support direct lending operationally.

What are the biggest challenges and opportunities they face today?

AK: I think one of the biggest chal­lenges for managers is how to best col­lect data and use technology to stream­line workflows and enhance processes across the firm. Many alternatives man­agers have invested in some type of data warehouse for that purpose.

Identifying the right system to achieve those goals for credit invest­ments can be especially challenging due to the additional data points, cal­culation requirements and volume of transactions related to the asset class. Partnering with a good fund adminis­trator specialised in credit investments can make a big difference, and can help to find the right balance between lev­eraging technology and use of limited internal resources.

GM: Management companies need to decide how they are going to allocate staff, systems and costs in a world of limited resources. Do you build all that institutional grade infrastructure inter­nally or opt for external providers? Or is there some way to marry the two that differentiates you from other managers in terms of raising capital and meeting your reporting requirements? Given the breadth and depth of third-party service providers, many managers elect to build in-source/outsourced models that marry the best systems, internal and external resources.

How can fund administrators provide support to managers looking to keep their back-office functions efficient and compliant?

AK: It can be difficult to find a single service provider to augment what you would otherwise have to build in-house for accounting, operations, reporting and performance tracking for private credit investments. Investment ac­counting, fund accounting and investor accounting can require their own ded­icated systems. Fund administrators specialised in loans can enhance a cred­it manager’s ability to find a scalable solution and take advantage of these specialised systems.

GM: What is important for most as­set managers is to make sure the fund administrator has the systems to satisfy all those elements of their organisation and to enhance and support all those different areas of the business. Giv­en the different needs from the front, middle and back offices, it is important to consider the various requirements of those constituencies when selecting that administrator.

ESG has been a big theme in the past decade, and ESG data will be a big theme for the next decade. What do managers need from fund administrators in that area?

AK: For managers seeking to integrate ESG considerations and collect data points during the investment process and throughout overall portfolio opera­tions, getting that data into a system and a useable format is one of the best ways that fund administrators can help man­agers to leverage those with ESG goals.

GM: What managers need here really varies. Our systems are able to capture and track the different ESG data points, so it becomes a question of the extent to which it is collected and reported on. It is the ability of an administrator to track that data and report consistently on the results that provides the most valuable support to managers.

Ten years from now, what do you think credit managers will be focusing on in relation to ESG?

AK: Ten years from now, I think credit managers focused on ESG will be look­ing to see the impact on their invest­ments.

GM: Being a realist, I think there is going to be a divergence of managers based on their investor base. There are going to be ESG funds and non-ESG funds, and it will be interesting to see how the two perform when we look back.

I will be curious to see how the Se­curities and Exchange Commission and institutional investor groups agree to a coherent approach to ESG and DE&I, so it is hard to imagine how the approach will play out.

Which regulatory developments on the horizon will most impact private credit managers?

AK: I think there will be more convergence between US and international regulations. I imagine developments will continue to focus on tax and performance reporting. The growth of the asset class will likely lead to an increase in regulations specific to credit investment managers and direct lenders.

GM: Because of the proliferation of private lending across the US, a lot more states are going to start regulating asset managers’ direct lending to companies based in their states. That is going to become a big focus because that framework exists for banks but does not so far exist for direct lenders.

How is investor demand for private credit evolving over time, and what strategies and regions are currently attracting the most LP interest?

AK: Leveraged senior loan portfolios have been successful in a few forms and there seems to be some renewed interest in mezzanine funds. I believe LP demand for private credit continues to grow, but so is the competition for those commitment allocations. Manag­ers will need to continue to differenti­ate themselves. I think it helps to have the right mix of strategy offerings, and the service and technology infrastruc­ture to provide the information trans­parency and portfolio data investors desire.

GM: Credit is now a very well under­stood asset class compared with a dec­ade ago, so allocations will continue to increase, just as they have in private equity. Investors are going to maintain those allocations moving forward – a big attraction is that most of the assets are in variable rate assets, so they can track up as interest rates increase.

As far as regions are concerned, Eu­rope and North America continue to be strong. Asia will continue to have at­tractions for private credit managers as manufacturing leaves China for other parts of Southeast Asia.

On strategies, we see a growing number of asset managers focused on lending to funds, almost as a compet­itor to the traditional role the invest­ment banks played in providing sub­scription lines. That is a relatively new strategy, but the ability of managers to source and access leverage for funds has become increasingly challenged. Those credit lines that managers use to increase or enhance returns, or for the bridging of investor capital, will be a growth area for private credit in the next decade.

What have been the biggest drivers of the outsourcing trend to service providers in the past decade?

GM: There is a much better under­standing in the institutional investor space that these funds have certain expenses that need to be allocated to them, and that fits well with having an outsourced fund administrator model where those costs can be directly borne by the fund. You do not need as many internal staff to monitor the outputs of those external service providers, so it ensures a leaner infrastructure. Given skill shortages and the dearth of hiring talent, the other big driver is the access we provide to experienced profession­als.

AK: The ability to tap into technology that would otherwise have to be devel­oped in-house, alongside a stable ser­vice team, has definitely become more important through covid and an unex­pectedly more challenging post-covid era.

What will fund administrators need to do to stand out and meet manager demands in the next 10 years?

GM: The priority will need to be con­tinued capital investment in technolo­gy, systems and delivery mechanisms to get data out of fund administrators’ systems and into managers’ data ware­houses. The number one requirement for our clients is data.

AK: When it comes to data and tech­nology, managers and fund admin­istrators all seem to be at a common crossroads regardless of size. Every­one is trying to find a way to collect and use data to build efficiencies, cre­ate additional value and differentiate themselves. One of the biggest chal­lenges is finding the right mix of tech­nologies and services to achieve those objectives, at a cost that makes them scalable. 

This article was originally published in PDI's Decade of Outsourcing Report. Greg Myers is Group Sector Head of Debt Capital Markets at Alter Domus and Andrew Kyung is Controller and Vice-President, fund administration at AEA.

Key contacts

Greg Myers

Greg Myers

United States

Global Sector Head, Debt Capital Markets

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