Back-office blues for private debt

As the asset class continues to grow quickly, it is struggling to ensure that administrative aspects keep pace.

Private debt managers are no strangers to the kind of administration and reporting challenges that affect private equity fund managers. In a survey published by industry body the Alternative Credit Council it was revealed that 90 percent of private credit managers identified loan administration challenges of one kind or another.

The number of respondents made the survey credible – accounting as they did for some $120 billion of assets under management, or an impressive 20 percent of committed private credit capital globally. Almost half of this broad universe (45 percent) pointed to two issues in particular: firstly, reporting to investors and regulators; and, secondly, the limitations of loan tracking systems.

Part of the problem is an asset class struggling to keep up with its own growth. Fundraising has skyrocketed in recent years, reaching a new record level last year. Rapidly increasing funds under management translates into greater strain on the back office. Moreover, in a borrower’s market, fund managers are having to bend over backwards to provide the kind of targeted propositions that will win them deals.

As Nick Smith of AIMA, the parent organization of the ACC, told sister publication Private Debt Investor: “What we find generally is that loans are not standardized. The type of lending is tailored to the circumstances of the borrower, which is great, but firms are challenged by that specificity.”

A deal execution professional’s dream outcome, in other words, is potentially an administrator’s nightmare.

As with any issue, whether personal or professional, a big part of the solution is admitting you have a problem. In this respect, there are promising signs with most respondents claiming they were taking action to address their shortcomings by building more efficient back-office operations. Some are choosing to do this by outsourcing to third-party providers, with almost half saying they already used external firms to support their in-house loan administration and 70 percent saying they recognized that service providers could help them manage non-traditional loans better.

For first-time fund managers, embracing high-quality loan administration systems could be the kind of differentiator they need to capture investor attention in a crowded market. When Apera Capital launched towards the end of 2016, it was notable that one of the things it was most keen to talk to us about was fund reporting technology it was putting in place with help from Black Mountain and SEI, which it claimed was the first cloud-based platform used by a European manager that could reconcile complex underlying loan, fund and company data on a weekly basis.

Apera’s CFO Rob Shaw told sister publication Private Debt Investor at the time that, in his view, “legacy systems are struggling to cope.” That much is borne out, a year and a half later, by the ACC survey. Hopefully, credit managers have realized that – by pursuing complexity to push themselves ahead of the competition – they cannot afford to skimp on the operational architecture needed to support it. If they do, limited partner patience will soon wear thin.

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