Private debt (or private credit) has emerged as one of the strongest asset classes within the alternative investment universe. During the fourth quarter of 2023, the deal flow for private credit picked up, reversing the slowdown seen earlier in the year. In its alternative investment universe outlook for 2024, JP Morgan continues to overweight private credit.
So, what is private debt? It is the kind of lending where the debt finance to companies comes from funds, rather than banks, bank-led syndicates, or public markets. As the private equity market continues to see challenges, private debt is becoming an alternative investment vehicle for private companies looking to raise funding.
Ankur Agarwal, co-founder and CTO of Gurgaon-based PE Front Office says private debt represents 12 to 15 per cent of the overall alternatives market and “is one of the primary strategies of the alternative investment funds across the globe.”
With assets under management growing from billions to trillions in the past one-and-a-half decades, private debt is thriving and with that comes a number of technical challenges. With its SaaS product built with a focus on the front and middle office processes for alternative investment management, PEFO solves a number of these challenges and Agarwal is preparing investors for this challenge.
Technological obstacles
As private debt becomes the preferred investment avenue, Agarwal, who co-founded PE Front Office with Anup Kumar Adlakha, says it brings forth a number of technological obstacles. The first challenge, he says, will come in the form of strain on existing systems due to the surge in transaction volumes and thus scalability concerns.
“The intricate nature of handling extensive financial data sourced from diverse channels necessitates robust data management solutions to ensure accuracy, integrity, and security,” he explains.
He adds, “Advanced analytical tools are indispensable for evaluating credit risk, identifying investment opportunities, and monitoring portfolio performance, yet their development and implementation for private debt instruments pose challenges.”
Apart from these challenges, PEFO also sees keeping pace with evolving regulatory standards and possible cybersecurity threats due to digitisation as operational challenges that need modern and adaptable technology systems. Like any other investment vehicle, there will always be the need to meet investor expectations and effective management of market volatility.
Agarwal is very quick to call these technical obstacles one side of the coin. The other side of the coin is the due diligence process, which involves a ton of data crunching and analysis. “Then there’s loan management which can get pretty complicated, especially with complex loan structures and loan defaults. Plus, investors need to keep a close eye on how each loan is performing and generate reports for all stakeholders,” elaborates Agarwal.
PEFO to streamline processes
Agarwal might be biassed to say PE Front Office is the best platform to streamline various processes involved in managing private debt but there is a lot of backing for this claim. The platform assists in managing the deal pipeline by providing a tailored workflow for streamlining due diligence and enabling efficient tracking of deal progress.
There is also investment management, which automates tasks such as generating amortisation schedules, managing cash flow and valuations, and monitoring investment performance. It also simplifies portfolio monitoring by consolidating financial, KPI, and ESG data on a single platform to facilitate compliance and error reduction.
“PE Front Office also aids in investor relations management by recording investor information, tracking fundraising progress, and facilitating communication and reporting through dedicated portals,” Agarwal tells me.
For instance, if a client has been tracking investment details, loan cash flows, investor drawdown/distribution, currency impacts, etc using Excel sheets that are linked together. This system will work well for a small team but as the organisation grows, the Excel-based management will lead to complexities in investment structure and the number of cash flows just could not fit into this tool.
Agarwal explains that they were able to replicate the sheets for this client into the platform along with historical data. Despite the switch, the team members of the firm were able to use the new system since terminology, calculations, and data were familiar to them.
He adds that the common roadblock for investors is integrating new tech becoming trickier than anticipated and thus scalability becoming difficult to achieve. Data security is another challenge since overlooking it can lead to serious trouble and meeting regulatory compliance is a different hurdle altogether.
While venturing into tech for lending via private debt can have its challenges, PE Front Office sees them as solvable if technology is made to work seamlessly. They do this by ensuring smooth integration of existing systems, prioritising efficiency and minimal disruptions.
As a tech firm, scalability and data security are non-negotiable for PE Front Office, which helps clients safeguard sensitive financial data and ensure compliance with regulations. “We understand the uniqueness of each business, offering tailor-made solutions that align perfectly with the needs and objectives of each business,” says Agarwal.
Navigate technological change
As private debt grows in popularity, it is also being done with the help of tech and Agarwal says this change is here to stay. He sees technology becoming the common denominator for all forms of alternative investments and thus recommends investors take several proactive steps.
He recommends starting with an assessment of their current infrastructure by evaluating existing technology systems and processes to identify areas for improvement and compatibility with future advancements. The second part, he reckons, is collaborating with technology partners, vendors, and industry experts to explore innovative solutions and implement best practices.
“Developing a strategic technology roadmap outlining short-term and long-term goals, priorities, and timelines is crucial for adopting new technologies and upgrading existing systems,” observes Agarwal. “Prioritising data security and privacy measures, testing new technologies in a controlled environment, and iterating based on feedback ensure successful implementation and adoption,” he adds.
Most of the time, private debt investors don’t understand where to start or what portion of their business process should they start using the technology for. At PE Front Office, they have domain experts to help investors identify the most critical pain point and create a mini-project to automate that part.
If a client wants to address loan management first then they advise them to pick loan models used most by their investment team and apply the 80-20 rule to automate those loan models. “This allows clients to pick low-hanging fruits while at the same time pushing the bulk of their operations into the system. Then the remaining 20 per cent of models are picked along with specific nuances and modelled into the system building upon the framework that has already been set,” explains Agarwal.
When Silicon Canals spoke to Agarwal, around 30 to 35 per cent of its customers were using PE Front Office’s debt management solution. “The volume at which assets are increasing in the private debt market, I would not be surprised if private credit nearly doubles in the next 5-6 years.”
PE Front Office anticipates more than 50 per cent of its customers would be from private debt. For those customers, PE Front Office will serve as a solution tailored to their specific technological needs and one with seamless integration capabilities, minimal disruption, and maximum efficiency. It also delivers robust security and regulatory compliance features such as covenant tracking and audit trails incorporated into the platform.
With PE Front Office, private debt investors can navigate technological change effectively and leverage technology to enhance operational efficiency, risk management, and decision-making capabilities.
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