The author of this article argues that staying ahead in Asia-Pacific's expanding private debt market means adapting quickly to rising competition and complexity – and that requires technology.
The private debt market in Asia-Pacific is expanding – as it has in other developed markets because of this sector’s attractions in terms of yield. Private markets, however, bring new levels of complexity, and when wealth managers and family offices need accurate, timely information, technology is essential. Unsurprisingly, therefore, firms operating in this tech space are keen to make the case. Here, Cameron Bunnell, senior director of product strategy at Broadridge, examines how the market has evolved. The editors are happy to share these views and insights; the usual editorial disclaimers apply. Email email@example.com
Emerging from the void of the Global Financial Crisis, the private debt industry has matured to become an established cornerstone of alternative investment portfolios. At the end of 2021, Preqin, the research firm, estimated that total industry assets under management stood at more than $1.21 trillion 1), registering an average 13.5 per cent annual growth rate over the last ten years (2). More impressive still is that this momentum is accelerating amid investor demand for yield and the differentiated risk exposures this asset class can bring. In fact, by 2023 it is estimated that private debt is on track to become the second-largest alternative investment asset class globally and by 2026 will reach a staggering $2.69 trillion in AuM.
North America and Europe have long been hailed as the private debt epicentres of the world, but the gravitational pull-on capital has steadily shifted eastwards. Indeed, by many measures the private debt industry is already booming in Asia-Pacific. Over the past five years alone, AuM held by closed-ended private debt funds has doubled to more than $60 billion (3) as traditional bank lenders have further ceded market share in favour of alternative lenders to de-risk balance sheets and comply with tightening regulations. The liquidity gap left by traditional credit institutions has increasingly been filled by rising numbers of LPs and GPs looking for attractive opportunities in the region, pushing competition for deals to record highs.
Covid-19 pandemic: growth
The last two years have presented unique headwinds for the private debt industry in Asia-Pacific. With the region implementing strict lockdown measures and economies responding in kind, calls for a surge in loan defaults and a spike in broad-based credit downgrades were abundant, roiling the confidence of asset managers bracing portfolios for a liquidity crunch. The fear was understandable. Operational disruptions across various industries questioned the financial health of borrowers and their operational ability to meet debt interest burdens and therefore private debt managers to meet investor return expectations.
Despite these challenges, the asset class proved more resilient than expected. Capital has continued to flow into the region and returns have remained buoyed on healthy, high-quality loan origination volumes. Non-traditional direct lenders acted quickly to support borrowers throughout the crisis, deploying more capital across a greater number of private debt-backed deals in 2020 than in 2019.
As we come to what is hopefully the tail end of the pandemic there are many lessons that we think will stick with private debt fund managers, but chief among them will be the criticality of robust technology infrastructures. Ensuring operational flexibility, enhancing decision-making capabilities, and transparent communications with investors took on a whole new level of importance throughout the crisis. Firms quickly advanced their digital transformation roadmaps years ahead of schedule.
In my own conversations with industry leaders, there is no question that the majority believe that digital capabilities are a key determinant of competitive advantage and, ultimately, performance. This is echoed in recent findings from Broadridge’s 2022 Digital Transformation and Next-Gen Technology Survey which highlights that firms across the private credit continuum see significant gains to be made in driving their digital strategies forward.
The inherent complexity of managing portfolios within this asset class has always necessitated a basic level of digital adoption, especially so at scale. A big part of the reason is what makes private debt so attractive in the first place for investors and borrowers alike – its bespoke nature but ultimately yield.
Consider, however, the complexity of the data model needed to manage a portfolio of many loans. At its simplest level it will include loan facilities themselves, various maturity timelines, bespoke repayment schedules, shifting interest rates, collateral details, covenants, and issuance jurisdiction specifics. Beyond the asset class itself, managers require a data and technology model to account for regular financial disclosures of borrowers, compliance information, portfolio level accounting, liquidity management analytics and the aggregation of fund performance data for investor reporting. The prerequisite data complexity impacts portfolio managers and investor confidence alike, who’s lynch pin is a robust technology stack.
While fund managers across Asia recognise this digital dependency, many new entrants still fail to appreciate just how complex and multi-dimensional their operational workflows truly are. To make matters worse, the technological pressures placed on GPs are rising post-pandemic, both internally and externally.
The pandemic-induced uncertainty of the last couple years has made the importance of near real-time transparency and automation blatantly clear. Fund managers have had time to experience the growing need for integrated, end-to-end visibility of their operations to empower insights and make high-quality decisions from loan origination through to seamless investor communications and reporting. Similarly, the rising sophistication of institutional investors and a growing desire to better understand portfolio risk more holistically has meant on-demand look-through transparency with fund managers is no longer a nice to have but imperative.
Many of our existing and prospective clients are already investing significantly in bolstering their digital capabilities to meet these post-Covid realities and secure a defensible advantage over peers. It is with this in mind that Broadridge continues to enhance its own unified Portfolio Management for Private Debt platform to help lower the barriers to digital transformation at scale across the front, middle and back office in support of the entire investment lifecycle. Broadridge seeks to stand out in today’s competitive environment but will increasingly require fast, flexible, and dynamic portfolio solutions like this to cut through the noise and focus on what matters.