Private Debt Is Finally Realizing It Has a Data Problem

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We’ll look back on 2020 with plenty of judgment, but one positive outcome has been the realization in virtually every industry that digital transformation is imperative for survival. Private debt fund managers, which have been slower than other fund managers in the private markets to prioritize this, are now clambering to centralize their complex data.

Why now? This has been a tumultuous year for the private markets. Fundraising slowed, then gradually picked back up. Managers grappled with how to allocate their dry powder during a period of uncertainty. Everyone wondered if an economic recession would lead to greater opportunities for private debt managers or if the lack of clarity around valuations would hinder them. The global pandemic forced all asset managers to better understand their risk exposures.

Meanwhile, the drumbeat of demands for more transparency from LPs grew ever louder. Institutional investors want to understand how their risk profile may be shifting in real time. For asset managers in the private markets, we see two features that have become paramount to winning (and keeping) investors: the systematization of the valuation process to track changes over time and the ability to scale scenario analysis at any level (e.g. portfolio, fund, region, asset class, etc.).

We don’t pretend to have all the answers to the macroeconomic questions nagging at private fund managers today. But despite this choppy environment, we’re certain of this: Private debt asset managers are getting bigger and more complex. There has never been a more urgent need for them to modernize their approach to data management.

 

Solving a Uniquely Complex Need

What does that mean for private debt managers? The data in this asset class is bespoke—it can vary greatly from one loan to the next, one portfolio to another, from fund to fund. Unlike equity managers, credit managers don’t actually own the assets in their portfolios. They are loans, each with different covenants that need to be carefully tracked and analyzed.

The one thing these lenders have in common when it comes to their data is that it arrives from many sources, in different formats, and at varying time intervals. Private debt investors often waste valuable time trying to pull together financial information from Excel spreadsheets and PDFs that come from loan service providers, fund administrators, and borrowers. What we’re hearing from clients is they can no longer sustain the status quo efforts to track the loans in their portfolios and respond with ease to investor inquiries. They spend days or weeks putting together reports that would take hours with a centralized platform.

Private debt managers want to move their data systems into the modern era while ensuring the integrity of their data. For these investors, it’s about managing risk. That means being able to quickly assess how a new loan may impact concentration limits related to a fund and/or the portfolio or tracking individual covenants as they approach certain triggers.

Moreover, the uncertain economic environment is making it very clear that private credit managers need to better leverage data to more effectively manage risk and plan for the unexpected. They need to be able to quickly run scenario analyses across their portfolios and funds on demand.

Fund managers are tired of hearing about software “solutions” that force them to put a square peg into a round hole and adjust their data requirements, process and outcomes to fit into a system. They want a platform that is flexible enough to meet their unique requirements of today and centralize the data sets required to facilitate proficient and nuanced data analysis. They also need it to have the flexibility to meet their unknown future requirements as their investment approach continues to evolve.

We’ve observed firsthand how the leaders in this space are accomplishing this task.  We’re living through the next data evolution in the private markets space and private debt investors are now onboard. Those that are taking action now will win and those that are waiting or continuing with status quo will be left behind.

 

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