Plexus Investments’ Matthias Kirchgaessner says private debt fund managers should be doing more to implement technology into their lending process to truly get ahead of the curve.
Seeking “off the radar” investment opportunities for clients is a key aim for Plexus Investments, which has taken a particular interest in the way artificial intelligence technologies can be deployed to provide better investment strategies for asset owners.
The firm serves family office clients based in the German-speaking regions of Europe, and says these families want long-term capital commitment opportunities. Historically, this has meant seeking out opportunities in traditional credit and fixed income, but increasingly they are looking for an alternative through private debt.
Kirchgaessner has spent years examining private credit strategies. “I’ve seen more than 200 managers over the years – it’s a very competitive market right now,” he says. “I need to understand the direct lending business and research the managers who will scoop up loans in the distressed market.”
As part of his investigation into the private debt market, Kirchgaessner has noted that the industry is far from the forefront of technology use, particularly in direct lending.
When he spoke at PDI’s Munich Forum in June 2018, Kirchgaessner asked the audience who was applying AI techniques as part of their investment programme. Only one person raised their hand, and they were from peer-to-peer (P2P) lending company Funding Circle.
“For the P2P lenders, AI is at the core of their business model,” he says. “It is a key part of the underwriting process and how new loans are created.”
He believes the use of AI by private debt managers would offer many advantages to improve both underwriting and loan administration. AI systems can generate more accurate profiles of potential borrowers, enabling better pricing of risk.
“The big risk with traditional direct lenders is if they do not do so much underwriting and aren’t looking at how they could use quant techniques to improve their process,” he explains.
As well as aiding the underwriting process, AI techniques can also help in the ongoing management of a loan portfolio to monitor and manage risks in real time.
Kirchgaessner adds: “Rather than waiting for reports at the end of a quarter, lenders must be more hands-on by using regular data on portfolio companies so they can see the trends that are developing in their underlying investment and react sooner.”
Kirchgaessner is not the only one to highlight a need for better technology use in the direct lending space. Arbour Partners’ James Newsome has dubbed the next stage of technology development for private debt as “direct lending 2.0”, focused on platforms and data being used to provide loans. This form of lending has already entered the market via various SME lending platforms, such as Funding Circle.
There remains little data or understanding about the extent to which private debt managers in the direct lending space are deploying technology or what their future plans involve. Kirchgaessner is hoping to survey fund managers to get a deeper insight into their technology research and development and find out where the industry stands on what he believes is a crucial issue for the future.
“Technology hasn’t really been on the agenda at private debt conferences so far and there is little discussion of technology in private lending overall,” he says. “We see some areas like trade finance where there is work on using state-of-the-art technologies like blockchain, but direct lenders are really in a stage of pretending they’re doing serious technology work rather than engaging.”