Beyond Excel: Special report on private credit technology
Technology is paving the way for private credit’s explosive growth – but are fund managers doing enough to integrate new systems? Kathryn Gaw finds out…
The phenomenal growth of the private credit sector has created something of a gold rush for technology providers.
As smaller private credit outfits scale up, new technology has become a non-negotiable. Investors, regulators and ratings agencies are demanding ever-more data transparency, and Excel spreadsheets can no longer cut it. Meanwhile, the new credit-based divisions which have been spun out of private equity managers have found that private credit comes with an entirely different set of reporting requirements and software needs.
Private credit needs systems in place which allow for the analysis of different loans. Each of these loans comes with their own risk modelling data, covenant monitors, and forecasting metrics. While this level of analysis can be achieved in-house, it is an enormous undertaking, and a lengthy process. So private credit fund managers have been turning to the experts.
“I’ve seen an uptake in managers saying, we now need a system,” says Kevin Hogan, head of private credit fund services at Aztec.
“I’ve seen many of them trying to redesign their operating model now that they realise they’ve got to that stage where there’s a problem operating manually, and they want to invest in a solution.”
Cynthia Sachs, founding chief executive at data and technology firm Versana, has also noticed this shift.
“If you look at the leaders on the banking side, they are massively investing in technology,” she says. “I don’t think it’s a question of should you or shouldn’t you. I think it is, ‘yes, we are, and how are we doing it optimally?’”
Fund managers are meeting the need for new technology in three ways: they are outsourcing their tech needs to third party providers; they are investing in bespoke in-house solutions; or they are taking a hybrid approach.
Northleaf Capital operates one of these ‘hybrid’ positions, taking ownership of its overall architecture, while also using third party solutions to address particular needs.
“We have definitely relied on outsourced providers for the individual components, but as an organisation, we have a very large number of underlying positions to manage,” says Jon McKeown, managing director of portfolio strategy at Northleaf.
“We have the complexity of having credit and infrastructure and needing to bring all of this together. At times when we’ve looked at off the shelf solutions, it’s been a little bit of a square peg in a round hole situation. We’ve been willing to undertake the work to customise things and capture data in the way that we would like to see it organised. I think this has the benefit of bringing people closer to the data and taking more ownership.”
Over the past year, there has been a noticeable rise in the number of new tech solutions for private market products. In May, Aztec launched a dedicated alternative investment fund manager service in Luxembourg in response to client demand, and the firm is now expanding into the US market, where it sees even more opportunities.
“Pre-financial crisis, private credit was a relatively small piece of the private markets industry as a whole,” explains Hogan.
“It’s really picked up over the last 15 years. The attractive returns and the consistency of those returns are a different proposition in the private markets business today.
“And as a result, you get institutional investors coming in and they’re allocating an awful lot more of their wallet towards the private credit market. What we’ve seen is a lot of our real assets clients in particular are starting to branch into private credit.”
These clients come with a host of requirements which vary depending on their investor base. Insurers are more interested in the cash flow and duration of the loans, whereas pension funds tend to be more concerned about portfolio risk, outcomes, and sector trends. Others will only consider investment-grade private credit funds, which requires its own form of structuring. And then there are the relatively new retail products, such as ELTIFs, which are attracting individual investors into the sector for the first time. They want more data transparency.
This ever-changing spectrum of investor needs makes it extremely difficult to standardise data within the private credit sector. Further complicating things is the fact that many private credit fund managers are industry veterans with their own way of doing things. They are used to Excel spreadsheets and manually inputting data on a loan-by-loan basis. In some cases this is unavoidable, but Aztec believes that there is room for much more efficiency.
“Typically, when you’re in a private credit fund, there’s a loan agent who looks at the specifics of the loans and the cash flows of the loans, and communicates those to the borrower,” explains Hogan.
“A lot of that tends to be very manual. The efficiency of the market as a whole, I think, is going to get much better when that agency data becomes normalised, when we have a way that agents can produce standardised notices in a more tech-friendly manner for consumption automatically.”
However, even with the support of third parties, there is a certain amount that fund managers simply have to do in-house. For instance, Hogan says that it is important for private managers to have their data programme and technology solutions ironed out before onboarding a fund administrator.
“There’s only so much that an administrator can provide to you in terms of what data points we’ve captured, what we’ve put on the system, what we can feed over, and we can do that in a very efficient manner,” he says. “But there are elements that are outside the data set that must come from different sources.
“Private credit managers need a way to house the data coming from external sources such as administrators, with the data that they have or that they provide themselves.”
Northleaf’s McKeown has historically worked with Microsoft systems such as Power BI, as well as external tech providers. He believes that the next step in private credit technology is integration.
“The more interchanges you have where you break between systems, the more possibility there is for error,” says McKeown.
“You may have one or two small pockets where an output will be taken from one source, and there will be a manual manipulation in order to have it be ready to be put into the next part of the system or the process.”
“I think the important thing for all administrators is the ability to play your data back in whichever way the investment manager wants to receive it,” agrees Hogan. “The ability to frequently deliver data in a seamless fashion, automatically out of the system to be consumed in a way that they, the investment manager, want to receive it in.”
In off-record conversations, a number of private credit fund managers have told Alternative Credit Investor that key man risk is their top concern when it comes to technology. Only the very large investment houses tend to have a dedicated CTO or equivalent executive who has full oversight over the firm’s tech processes, and a team of potential successors. For the medium-sized and boutique outfits, it is simultaneously a job for everyone and for no one. Everyone who is involved in the day-to-day life of a private credit fund must be able to use the same technology processes, and this can create an inefficiency in and of itself. After all, experienced portfolio managers are not hired so that they can spend hours reformatting key data points across multiple systems.
“Every single company in the world should have someone dedicated to technology,” says Versana’s Sachs.
“In my mind, it’s a must. We’re sitting in a technological age. There are so many new technologies coming out every day. Technology is what’s going to enable private credit to scale and actually grow. But it absolutely has to be front and centre for them to be able to grow their businesses.”
However, for firms who do not have the resources to appoint a dedicated CTO, outsourcing can be a favourable solution.
“Outsourcing means investment managers don’t need to make the same level of investment in technology because the initial and ongoing software and associated resource costs are absorbed by the outsourcing partner,” says Hogan.
“Equally, the arrangement allows managers to concentrate on the investment management side of the business rather than the back-office admin, provided they have appointed a reliable administration partner.”
Alternative fund managers understand the value of data-driven technology. You only have to look at BlackRock’s £2.55bn purchase of Preqin for evidence of this. The asset manager plans to combine Preqin’s data and research tools with its own investment technology to create a new private markets technology and data provider.
Since then, there has been a flurry of tech-related investment activity in the sector. Barclays has become the latest subscriber and investor in Versana’s next-generation platform, and Guggenheim Investments has begun the process of onboarding Allvue Systems’ technology to streamline its private debt portfolio. Meanwhile, private equity firm Warburg Pincus has struck a strategic partnership with Aztec which will make it both a minority shareholder and key client of Aztec.
“Technology will continue to become a more important part of the value proposition of private credit companies,” says Northleaf’s McKeown.
“I think that technology change will go slower than expected, but then it will go much faster than people expected at the same time, which I guess is a way of saying it’s probably going to go in fits and starts.”
Right now, we seem to be in the faster stage of technology growth. Fund managers are actively investing in technology integration and prioritising the streamlining of key processes – often with the help of a third party. With billions of new dollars pouring into the private credit sector each year, the time is right to finesse these back-office processes so that fund managers can focus on doing what they do best – originating good quality loans and keeping their investors happy.