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How technology is driving the future of private debt

16 Jan 2024

The rapid pace of automation and AI has been a hot topic across all industries around the world this year. In the private debt sector, technology has been driving change – both in how private debt managers work and the skills they need – over the last decade.

We sat down with Joanne McEnteggart, IQ-EQ’s Global Head of Corporate and Loan Servicing, to discuss automation, digital data collection and the difficulties facing private debt managers finding talent in a fast-changing environment.

For private debt and collateral loan obligation (CLO) managers, the calculation of interest can be time-consuming. How can automation make it more accessible?

One of the main challenges for private debt and CLO managers is the calculation of interest as it can vary in complexity depending on the limited partnership agreement. There’s also the inherent risk of the portfolio management team utilising multiple spreadsheets for very detailed and challenging calculations on very sizeable books of loans.

Private debt managers may also need to consider factors like compounding frequency, accrual methods, and any additional fees or charges that may affect interest calculation. Conducting these calculations on a simple spreadsheet can be cumbersome and prone to human error, especially since strategies, accounting and analysis reporting have become more complex.

Automating the loan administration process, including loan calculation, frees up time for the portfolio managers within the private debt and CLO management firms to focus on more important tasks like future forecasting the investment decisions on the rest of the book and impacts on concentration limits, in conjunction with risk management, regulation and returns.

IQ-EQ uses an industry-leading alternative investment software tool, Allvue, to provide loan agent and loan administration services to our clients. Our automated process covers a range of asset types including, but not limited to, broadly syndicated loans, private debt loans and bonds, and corporate and municipal bonds. We utilise ClearPar for our loan settlement solution.

Allvue also allows managers to see their dashboard of loans and underlying positions and instruments, giving them real-time access to their data in order to make strategic investment decisions. Critically for our clients, our loan administration platform is linked to our fund accounting platform, allowing for time and cost efficiencies in the removal of repetitive tasks and multiple data entry exercises. We utilise the same technology globally allowing for the true integration of systems across a client’s investment strategies, structures and jurisdictions.

How can digital data collection help private debt managers access transparent information?

Given the challenging fundraising environment, keeping existing LPs happy is paramount. LPs are now requesting quicker access to information and better transparency, and are often making ad-hoc data requests. A private debt fund manager must be operationally ready to satisfy these requirements.

If you’re still asking your fund administrator for underlying data in a spreadsheet format, now might be a good time to reconsider. Technological platforms allow private debt managers to efficiently deliver insight and reporting while developing ever more efficient business models.

With IQ-EQ’s data platform, we can deliver data we administer directly to clients’ in-house systems, fully automated, digital and structured. You no longer need to spend time managing investor relations, or sifting through files of information to find the data you need – you can access it directly, any time you want. Our reporting suite within Allvue and FIS Investran also presents sufficient data to enable decision-making for firms who do not as yet have their own in-house systems.

Ensuring cost efficiency and business continuity is essential in the current climate. How can outsourcing talent help private debt managers?

Attracted by the consistent performance of CLOs, many alternative managers are establishing new credit desks. Getting the right operational support can make or break the performance of these ventures, as well as ensuring all aspects of operational risk have been analysed and factors to control such risks are being exercised.

As with increasing inflation, rising interest rates and management fee compression, more and more private debt managers are evaluating their operating model and use of outsourcing.

In the past, the outsourcing sector has been perceived with negative connotations, being associated with job losses, having to retrain people or losing control of processes and data.

As the sector has transformed over recent years, finding (and retaining) talent is a nearly unprecedented challenge, and even large firms are struggling to keep pace with the rapid advances in technology. The struggle is even more acute for private debt managers as their people need to be trained in complex calculations, using specific technology and working in an environment that is fast paced and time sensitive for deal completion.

Outsourced service providers have become more embedded in understanding their clients’ businesses, sharing best practices and providing teams of staff that align with the specialist skillset required while also ensuring personal relationship alignment. They’ve become an integral part of the internal operating model for a debt or credit vehicle. Outsourced solutions can help protect your margins and reduce your risk.

At IQ-EQ, our global private debt and credit desk team has unique expertise supporting private debt managers around the globe. We’ve serviced alternative asset managers, including those in the debt and credit space, for over 20 years, and as such, we’ve built centres of excellence for loan servicing in our key markets. Our teams, resourced with technical experts, can be scaled up or down to support the peaks and troughs our clients experience in their debt lifecycle and investment patterns.

For a new manager, with our support we can ensure that the manager can launch their strategy faster and start compiling their assets in warehousing through utilising our loan operations and loan settlements teams. Faster access to markets is a real game changer at the moment, as access to assets has become quite competitive in the credit space.

How have your clients directly benefited from using IQ-EQ’s outsourced solutions?

Our clients have benefited from outsourcing talent in several ways. Many established companies have utilised our services by building out a team within IQ-EQ when their current staff have either resigned or a position opens due to organic growth.

Rather than going through the long process of hiring themselves, they have increased their headcount by leveraging IQ-EQ to hire, train and engage additional resources on the team – with each person feeling part of the client’s team and building a strong relationship as if they were hired directly by the client themselves in our client extension model.

In some instances, if the credit team is an internal spin-out within a large bank, they may find themselves conflicted from utilising the bank’s infrastructure as they create independent structures in conjunction with their new investor communities. Our independence at IQ-EQ and track record of over 20 years serving the alternative market space is paramount in our support for these types of ventures.

Our teams are cross-jurisdictional, which really supports managers who are expanding their footprint and need to understand the local nuances, reporting and regulatory considerations of new markets.

Regular feedback from our clients indicate they appreciate the flexibility it gives them to scale their businesses in a cost-effective manner, while ensuring quality.

Clients also enjoy the close relationship they build with our people, with many feeling as if the IQ-EQ team is actually part of their team.

If you’re interested in building a new credit desk, or in IQ-EQ’s cutting-edge technology solutions, contact a member of our team today.

Working with IQ-EQ has been seamless – you and your team understand our business, advise us appropriately, and handle your side of our collective partnership so that we can focus on making good investment decisions. Evan Gibson SVP, Merchants Capital

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