Private Credit Pivots on Outsourcing, New-Age Tech
Technology providers to the rescue in managing risk, boosting workflow
The explosive growth in private credit markets is compelling players to scale up their technology infrastructure, improve data capture and enhance workflow efficiencies, according to the panelists on a recent Coalition Greenwich webinar The Evolution of Credit Portfolio Management.
The webinar was moderated by Kevin McPartland, Head of Market Structure & Technology Research at Coalition Greenwich.
“We're seeing institutions that were never present historically enter this market. This presents challenges when players are looking to scale their technology,” says Elina Gokh, Global Head of Credit Software Solutions, S&P Global Market Intelligence (SPGMI).
Adrian Iosifescu, Managing Director and Chief Technology Officer at alternative credit specialist CIFC, notes that the private debt market has grown to $1.5 trillion today. “The technology behind it has moved at a rapid pace.”
That’s because the private credit market has not benefited from the regulator-driven infrastructure innovations of the public debt market, points out Scott D’Orsi, Portfolio Manager, Putnam Investments. Putnam has outsourced its entire back-office operations. “All the trade-flow processes and data reconciliations are captured and executed in real time. This allows us to stay ahead,” he says.
SPGMI’s credit solutions business, which manages over $800 billion of assets, has seen a huge shift to outsourcing. “Clients are focusing their staff on driving risk management and portfolio construction, and letting vendors take on scalability of operations,” says Elina Gokh.
SPGMI has adopted cloud technologies for scalability in order to tap into new opportunities. “Many of our legacy processes are based on running data-heavy reports, like end-of-day processes. We're shifting from this into event-driven design enabled by cloud, where the system is able to listen for a particular event, such as a borrowing request. Cloud technologies are allowing us to help managers consume data in a more real-time basis,” she says.
CIFC is also taking advantage of cloud-native capabilities. “Cloud has allowed us to support our proprietary development and embed third-party products into a technology ecosystem that provides the functionality our users expect,” says Adrian Iosifescu. Technology is also enabling players to improve data sourcing. “It's hard to manage credit risk in the private debt business because there is very little information in the market about the borrowers,” he explains.
The little data available is hard to get, too. CIFC is using artificial intelligence (AI) and machine learning (ML) to collect “any piece of information that can be brought in the forefront to portfolio managers.”
Putnam relies on multiple ratings and outlooks to manage the risk on collateralized loan obligations (CLOs). “These need to be integrated in real time. Running these ratings is a key data pipe for us,” says Scott D’Orsi.
He’s using third-party vendors to overcome data constraints. For instance, 70% of the leveraged loan universe is private debt, where information flows through a handful of secure deal sites. “Not everybody has access to all the financial information for all the borrowers or issuers in that market,” he explains. So, Putnam uses a vendor that “acts as a gateway for us to these secure deal sites. That's a key component that enables us to monitor the portfolio risk,” he says.
Meanwhile, the credit solutions business within SPGMI has achieved significant time savings in its managers’ workflows by automating the trade settlement process. “The front office can send allocations to our systems and the settlement process kicks off right away. It’s all message-based so that by the time the physical trade settlement happens, users are just managing the exceptions,” explains Elina Gokh.
No doubt, settlement time is still long in the credit markets, largely because a number of institutions touch a trade before it is settled. There are other bottlenecks as well. For Scott D’Orsi, the data lag on new private debt issuances is a pain point. “The loan ID can lag until you get allocation on that individual loan. Therefore, it's hard to capture all the data that’s relevant for the investment vehicles holding it, which is frustrating,” he says.
Adrian Iosifescu points to inconsistencies in data arising from different sources. CIFC has built algorithms to resolve this for its users. “But 50% of this data inconsistency needs to be addressed by the portfolio manager, which delays loan processing,” he says.
Going forward, Scott D’Orsi hopes the setting up of a consortium of major trading banks, as announced, will improve pricing transparency. Adrian Iosifescu would like to see the entire technology stack move to managed solutions “so that the few resources we have can focus on improving data quality.”
Elina Gokh is excited about using AI and other tools to improve front-office capabilities. “That’s going to be transformational for the industry,” she says. “This industry is built on incremental evolution, and we’ll continue to make strides,” she adds.