Profile icon Tick icon small Search icon Mobile nav icon Pin icon Linkedin icon Facebook icon Instagram icon Email icon Telephone icon Arrow down icon Logo Contact
images images
  • Home
  • Insight
  • Fund Operations
  • Loan servicing – closing the data gap for private credit funds
  • Article

    September 19, 2024

    Authors

    • images
      Todd Werner
      Head of Private Credit - U.S.
    • images
      Kevin Hogan
      Head of Fund Services Ireland and Group Head of Private Credit

    Loan servicing – closing the data gap for private credit funds

    With the private credit market growing at pace – it’s projected to be worth $3.5 trillion by 2028 – managers are looking for new ways to give their offering a marginal gain. One way is by optimizing how they collect, assimilate and effectively leverage their funds’ loan data. Todd Werner and Kevin Hogan explore how integrating teams, technology and the right data ecosystem can provide that competitive edge.

    In the rapidly evolving world of finance, private credit has become a vital component of capital markets. As companies continue to turn to private credit to meet their financing needs, the role of data in portfolio management has become critical. Accurate, timely, and comprehensive data is essential for assessing risk, valuing assets, servicing investors, and making investment decisions. A data ecosystem, integrated with the right team and technology solution, can sharpen a competitive edge where margins are thin, and investor demands are high.

    The popularity of private credit as an asset class surged dramatically following the global financial crisis of 2008/09, reaching an estimated $1.5 trillion by the end of 2023, according to Preqin. This growth has been fueled by ongoing shifts in public markets, investor appetite for higher but reliable yields and portfolio diversification, and borrowers’ preferences for more flexible financing options. According to BlackRock’s 2023 report, Private debt: a primer – unpacking the growth drivers.

    Structures and strategies in private credit

    Private credit encompasses lending activities between borrowers and non-bank lenders. Types of private credit include direct senior lending, junior capital (such as mezzanine, second lien debt, and preferred equity), distressed debt, and specialty financing.

    This asset class can offer higher returns and greater protections for investors compared to public market debt. This is due to the lenders’ ability to negotiate loan terms, exert pricing power, and enforce covenants to monitor and restrict borrower activities. Covenants provide transparency and enable early detection of potential financial issues of the borrower, safeguarding lender interests. In the public markets, an investor must rely on the evaluation by the underwriters at the financial institution that underwrote the loan to assess the financial health of the borrower and are relatively inflexible on covenants.

    Investors in private credit range from limited partnerships and registered alternative funds (business development companies, interval funds, tender offer funds) to separately managed accounts, insurance companies, and private wealth managers, all of which necessitates tailored product structuring and reporting.

    Real-time data speeds up reporting

    A data ecosystem refers to the network of users, processes, data sources, and tools used to assimilate and manage data. Key to building a fit-for-purpose data ecosystem is instilling a culture of data as an asset, creating a data governance framework, maintaining data quality, integrating data effectively, and investing in a scalable technology infrastructure.

    A robust data ecosystem, once created, can more easily fulfil the requirements for borrowers, lenders, and investors across structures and strategies. It helps ensure all regulatory requirements are satisfied and makes the delivery of real-time reports possible. For example, U.S. business development companies which invest in small and mid-sized companies, require a 10K (an annual report providing detailed information about a company’s financial performance) and a 10Q (quarterly reports on a company’s financial performance that are less detailed than the 10K, but more frequent) filing, to be completed in a timely manner for the SEC.

    Creating a process that allows stakeholders to access, review and amend data on a more timely basis streamlines the creation of these reports and so expedites the filings. Another example is that of large brokers who, as a requirement to be listed on their brokerage sites, require daily NAVs. To support daily NAVs, firms must have access to high-quality data and a technology solution that supports daily processing and includes comprehensive reporting capabilities.

    How data boosts operational efficiency

    A well-designed data strategy has many benefits, including improved operational efficiency and elevating the investor experience. When developing a strategy, it is essential to address the distinct needs of all internal stakeholders, including front-, middle-, and back-office teams as well as investors.

    Front office personnel require up to date information on the financial health of the borrowers so that loans can be restructured to avoid defaults. Minimizing default rates – the percentage of loans borrowers fail to repay – is a source of alpha for private credit funds. Firms that limit defaults can stay ahead of the competition.

    Middle- and back-office teams need detailed, real-time information to effectively monitor the financial health of the borrowers, and to support the settlement, tracking, valuation, and reporting processes associated with various investment products. Investor services personnel, meanwhile, need data to efficiently onboard new investors, support investor queries, and ensure compliance with regulatory obligations (AML, KYC, FATCA and CRS). Investors too need access to data reports through easy-to-access investor portals.

    What a data ecosystem should deliver

    Disparate data sources varied and often incompatible technology solutions, and data integrity are all challenges to an effective data ecosystem. These must all be navigated effectively to build a cohesive, superior data model that optimizes processing, supports high transaction volumes, captures granular data efficiently, and provides transparency through flexible reporting capabilities.

    A key component of a robust data strategy for the private credit market includes establishing a reliable process for collecting and reporting data on loans.

    The ideal solution includes these 5 capabilities:

    • Flexible loan setup options
    • Robust discount and premium amortization functionality
    • PIK and cash interest payment calculation modeling
    • Undrawn commitment fee tracking
    • Interest rate feed automation.

    Other functionality that should be considered includes deal-flow monitoring, a dedicated data capture process, and cashflow projections.

    To deliver significant operational efficiencies, the loan solution should integrate with the general ledger to streamline entries, which significantly reduces errors relating to the management of multiple applications.

    How we bridge the data gap

    Aztec’s Loan Servicing Unit combines the specific loan expertise of our people with the specialised experience of our eFront Debt loan processing system, to provide specialist, end-to-end support for your private credit fund. The team are loan and system experts and are agnostic to NAV cycles, resulting in speedier and more efficient processing, and the ability to provide position reporting in real-time to clients. They focus predominantly on the updating the Investment Book of Record (IBOR) integrating seamlessly and immediately to the eFront General Ledger thereby creating the Accounting Book of Record (ABOR).

    We’ve invested heavily in our private credit offering, turning it into a product that truly differentiates it in the private credit market. For more information on how we can support your private credit offering, please reach out to Todd or Kevin directly.

    images images

    Want to talk?

    To discover for yourself what makes us the bright alternative and how we can support, please contact Kevin Hogan, our Head of Fund Services Ireland and Group Head of Private Credit.

    images

    Kevin Hogan

    Head of Fund Services Ireland and Group Head of Private Credit

    Aztec Group eNews

    Aztec Group Careers Newsletter