An interesting panel session at this year’s ACC Summit in Banking Hall, featuring participants from Arcmont and Metrics, centred on how private credit funds are innovating, with a key focus on the use of new technology as a means of increasing efficiency.
The consensus was that technology (including AI, automation and contract management systems) is, and will increasingly be, critical to credit funds but that it will be most usefully implemented in specific (and limited) areas of operation. Its deployment will differ between different closed and open-ended fund structures. The undisputed caveat was, however, that careful thought must be given to replacing human involvement in any part of the credit and underwriting processes, but that freeing up deal team time to focus on originations and relationships will drive value creation.
Investors are wanting increasingly more information on fund and portfolio performance and with up to 200 data points (some primary and some derivative calculations) now being collected in respect of each investment, efficiencies have to be found to automate the management and analysis of such data and translate it into meaningful insights that are useful, and relevant to the credit executives and satisfy investor appetite.
In particular, key insights were:
- credit funds must implement new systems and innovate where possible in order to prevent costs spiralling and to ensure that credit executives have capacity for origination, underwriting and portfolio management;
- ESG is a particular focus area where managers see that technology can drive efficiencies, both in the collecting and collating of information but also, in circumstances where borrowers are not able or willing to provide information, in generating estimates against benchmarks and KPIs;
- for open-ended funds in particular, the application of technology to automate investor reporting and fund value benchmarking will increase efficiencies. Such efficiencies will also be seen in the context of fund secondaries and CLOs (where managers reported seeing good hygiene in respect of financial reporting and consistency of information flow becoming ever more in focus) and where funds encounter requirements for shadow ratings; and
- lenders are increasingly looking at sponsor performance (alongside debtor group analysis) and data gathering tools can enhance the efficacy and comprehensiveness of such investigations.
The panel was, however, unanimously adamant that technology would not soon replace the human origination, underwriting and deal negotiation processes, nor be able to substitute the importance of personal relationships (within the credit fund team, with portfolio company management teams and, in particular, with sponsors). Those are where a strong manager can generate most value and protect most effectively against losses and why the search for talent and "future leaders" (the topic of a subsequent panel at the Summit) were critical.
One area in which law firms are creating platforms to assist clients (particularly in the credit fund space) is in relation to portfolio and document management. For instance, the lawtech team at Macfarlanes have developed a secure, cloud-based system called Bastion. It offers centralised document storage that is user-friendly, even for complex fund structures. Bastion uses AI to find and extract key information from across stored documents, helping clients to better understand their data.
There has been a great deal of discussion about generative AI recently. AIMA released a checklist this week of considerations investment managers should take on board if they are to adopt generative AI and realise its potential in a responsible way. Macfarlanes have partnered with Harvey, a generative AI tool designed specifically for legal work, as part of its AI strategy. Following a pilot there was demonstrated clear potential to transform the way solutions and services are provided to clients to drive efficiencies for participants in the transactional process.
Whilst technology cannot replace the human skills and relationships that are essential for successful deal-making and risk management, it is playing an increasingly important role. The consensus is that the private credit industry will need to balance the benefits and risks of technology, and invest in it alongside continued investment in talent and culture, to remain competitive and resilient in the future.