Holistic Data Management in Private Credit

A comprehensive approach to data management in the private lending market

In the private credit sphere, competition is fierce and decisions need to be made swiftly. Managing the massive inflows of capital and corresponding volumes of data flooding the private lending market is a strategic priority.

Yet, pertinent data is often still locked in siloed systems, in-house Excel sheets, and unstructured documents. Operations personnel may create workflows and processes to construct a singular data bank to power analysis and decision-making. However, these processes are not scalable and, ultimately, still do not enable firms to seamlessly incorporate data into daily business activities.

Modernizing infrastructure is the key to helping private credit firms ingest, clean, normalize and distribute data to streamline processes, redeploy personnel to more critical business needs, and help build scale.

What’s driving the boom in private lending?

Tightened lending practices, Basel III endgame reforms, and an uncertain macro environment have helped private credit emerge as the golden child of the private markets.

As firms accelerate investments into private lending, we found several key factors are behind the boom:

• A need to bridge the funding gap as banks tighten their lending standards
• Attractive terms and returns for lenders
• The possibility of mitigating risk with a moderately safer investment
• An opportunity to enter an underserved market
• Investor demands for portfolio diversification, less risk of cash lock up, and more predictable returns

Through risk mitigation strategies, due diligence processes, and collateral protection, investors can navigate the risks, and borrowers can spend time adding value to and growing their business.

The growing need for high-quality data

Private credit has seen remarkable growth in recent years, outperforming public markets and constituting a substantial portion of the asset management industry. The approximately $1.5 trillion market consists of direct lending, distressed debt, mezzanine funds, real estate, and more.¹ And according to the same PitchBook research, it’s an industry that has more than doubled since 2016.

Private credit represents an important point of convergence for managers of different segments, such as private equity, hedge funds, and institutional asset managers. It’s also one of the younger and more operationally intense of the private market asset classes, lending itself to higher use of technology.

While we’re seeing firms embrace new solutions to manage their data, there are still challenges hindering the adoption of technology that can limit a firm’s ability to use data to its full potential.

Evaluating your data strategy

More competition and the need for quick, informed decisions to stay competitive are propelling the need for a thoughtful data strategy. A diverse set of stakeholders, from Limited Partners (LPs) and regulators to portfolio managers and management teams, are also demanding effective data utilization and timely responses to their inquiries.

As the asset class accelerates, fund managers face an array of operational concerns that require a digital, data-first solution, including:

• Higher investment volumes
  Higher investment volumes lead to a higher volume of structured and unstructured data that needs to be processed and managed to fully support the issued instrument during its lifecycle.
• Bespoke terms on loans
  Loan terms vary amongst issued instruments, requiring a sophisticated, pliable platform to master all aspects of a loan, including collateral information, covenant details, guarantor, and more.
• High volumes of asset servicing events
  Firms must be prepared to handle the various asset servicing events and appropriate treatment on a platform. Events such as repayments, payment in kind, or interest rate modifications require proper recording and handling within an operational platform.
• A surge in reporting requirements and frequency
  The Private Funds CFO Insights Survey 2024 found that in the past 12-24 months almost half of survey respondents reported that LPs are asking for more detail and analysis from their GPs.² Robust reporting systems and processes enable firms to deliver transparent and comprehensive reporting to stakeholders.
• Outmoded communication practices
  Historically, private credit relied on internal, proprietary methods to manage information and were often heavily dependent on tools like Microsoft Excel and paper-based communication such as PDFs. A holistic data infrastructure helps ingest, harmonize, store, and share clean data with downstream users and reduce or even eliminate manual touchpoints.

Mastering your data

Investment firms with private credit investments deal with various datasets pertaining to funds, investors, and investments that are often communicated in various formats, require thorough rounds of cleansing, and demand intuitive normalization.

Interconnected datasets must live in a singular location for effective utilization. Throughout any data infrastructure, features such as auditability, lineage, and others are table stakes. In today’s market, your firm must have a strong understanding of how to manage incoming data to invest intelligently, power the needs of internal business units, meet external stakeholder requirements, and ultimately maintain a competitive edge in the market.

Essential components of data management

• Collection and digitization on a single accessible platform will improve the accuracy, completeness, and consistency of information used across your enterprise.
• Cleansing and normalization through a rigorous and automated process will ensure data is harmonized and can be used for analysis and reporting.
• Quality checks and governance standards rely on well-defined policies and frameworks to ensure data is consistent, trustworthy, and has strong provenance for clear responsibility, ownership, and accountability of the data.
• Analysis and reporting from a synchronized source of data lets your firm use data to support daily workflows, discover new insights, and confidently respond to regulatory and client reporting requirements.
• A data platform and solution allows you to connect and organize unlimited volumes of datasets, enhances cross-company collaboration, enables egress, and ultimately positions your firm to grow and evolve.

How purpose-built technology helps master your data

Fit-for-purpose systems provide a centralized location to ingest and store data flowing in from multiple sources. Once data is on a unified platform, your teams can swiftly validate, harmonize, and distribute investment data, while also analyzing and reporting on it, and instituting defined governance standards.

Still, for many institutions there is comfort in the tools they know. You can ease the transition to new systems by selecting meaningful use cases rather than addressing all needs immediately.

In addition, collaborative teams from IT and business staff can work together to integrate the tools that best fit your organization. A partner offering data management infrastructure can also help bridge the learning curve as your teams adopt a new ecosystem.

While your firm must be ready to take a unified approach to address meaningful use cases, that doesn’t mean disrupting your current infrastructure. The co-existence of a unified data ecosystem with legacy systems will lead to more transformative outcomes.

Insights into our client conversations

We have maintained close relationships with clients, prospects, and key industry influencers as investments into the overall private markets have expanded. It’s been exciting to see interest in private credit strategies grow as investors seek alternative sources of yield and higher returns than what public credit offers. 2022 Preqin forecasts showed private debt accelerating to a CAGR of 17.4% between 2022 and 2026.

Like anything, though, growth can also create new demands. In our client conversations, high-growth private credit businesses reported the most challenges with data, asset servicing, and reconciliations. For many private credit firms, a regular processing and review cadence is important given the generally higher cash flows and number of investments. In addition, GPs want to improve automation for internal purposes and external reporting.

With diversification across asset classes, fund products, and distribution channels, many funds told us they lack a unified data fabric to tie together business functions, siloed systems, and multiple administrators.

How you can use holistic data management to embrace the private credit revolution

Tailored tools and capabilities that help make sense of evolving asset classes, fund products, distribution channels, and regulations will be key to setting your business apart.

A domain-aware operational platform that supports reference data mastering, entry of the typical investment lifecycle events, proper accounting treatment, and reporting across private and tradeable credit books of business key.

Furthermore, don’t try and do everything in one go. Think about meaningful use cases one by one, rather than attempting to address the needs of all constituents immediately. As cloud-native platforms become even more mainstream, you’ll want to carefully evaluate if your legacy tech stacks can support a digitally integrated ecosystem.

Modern data infrastructure has the opportunity to drive unparalleled value for firms. As the industry embraces innovation, the strategic integration of data will undoubtedly play a pivotal role in shaping the future of private credit. Firms intelligently integrating holistic solutions will emerge as leaders in this competitive landscape.

Read our E-Book, Mastering the Five Essential Pillars of Data Management in Private Credit, to learn more about the pillars of building a thoughtful data management strategy.

Author:
Sneha Raisinghani
Sneha is a Vice President in the Product Management organization at Arcesium and is the product lead for Private Markets. In this role, she is responsible for establishing the product roadmap, driving the product vision, and supporting Arcesium’s go-to-market strategy for this segment.

Sources:
1 Will more banks join the private credit fray in 2024?, PitchBook, January 16, 2024
2 Insights Survey 2024: How LP Scrutiny Is Increasing, Private Funds CFO, December 1, 2023

 

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