Fund services report: Black Mountain looks at innovations

Private debt fund managers are embracing new technology systems that private equity firms are not. Kevin MacDonald, co-CEO of Black Mountain explains why.

In the face of new regulatory requirements and demands from investors, private debt firms need cutting-edge systems to build their businesses. PDI finds out about some of today’s key trends with Kevin MacDonald, co-CEO of software company Black Mountain.

When looking at how managers handle and use data, what regulations are you focused on?

Regulation in private debt is not as pervasive as it is in public markets. MIFID II for the tradable markets and GDPR for all markets is the biggest focus right now as they both affect a decent number of our clients. We’ve been focused on both since the second quarter of 2017 and have provided solutions to many customers.

How do you feel the private debt sector lends itself to innovative fund management solutions?

I think there are several factors.We have been exploring the private equity market and it’s amazing how many big, complex private equity houses run their operations on Excel and are happy doing that. They think what we offer is relevant, but they’re still happy with what they have.The depth of research they do when they invest in a company is huge, so they feel that they don’t need data aggregation and operations and reporting scalability, as they know the management teams and the companies incredibly well. By contrast, private debt firms are not in a position to dig as deep, so they need more automation and data and aggregation. They also need to track debt covenants and there are simply more data points they have to track than private equity firms.

“Investors want to see their managers adopting best practices. and since each manager has their own ‘special sauce’, these managers require innovative and flexible solutions that can model their unique needs for managing the investment process as well as the investor reporting requirements”

Many in the private debt industry came from syndicated loan backgrounds and they’ve seen the kind of product we offer on the syndication side and they put it in their budgets and plan for it. Probably most significantly, investors are a big driver for solutions like ours in private debt. They often require a comprehensive management system as a prerequisite for their investment. Investors want to see their managers adopting best practices. And since each manager has their own “special sauce”, these managers require innovative and flexible solutions that can model their unique needs for managing the investment process as well as the investor reporting requirements.

Are new regulations governing trans- parency and reporting more of a challenge or an opportunity?

That’s an easy one to answer – it’s an opportunity. There are regulations that people have to conform to and you don’t just happen to meet those requirements. That’s clearly an opportunity for us. But the more interesting aspect is for those managers who aren’t yet customers.There may now be sufficient regulatory demands for those who have traditionally run their operations on Excel, to invest in a more capable system.While the regulation may be a burden for them, if it pushes them to invest in a system like ours, they can then reap the benefits of having the relevant data they need to manage their business at their fingertips.

Is the industry sufficiently prepared  to deal with the cybersecurity risks it faces?

That is a good question. I don’t know for sure, but I’d say it’s a work in progress. People are upping their game and some of the GDPR regulation around data privacy is relevant to this. GDPR is focused on data privacy, and although not necessarily cybersecurity, it drives firms like ours to make additional investment in solutions and infrastructure to meet the require- ments which de-risks the cybersecurity issues.

In the private debt market, most are focused on GDPR requirements, and to some extent they are investing in cyber- security by investing in systems like ours. But in my view the biggest risk to private debt firms is in relation to mundane stuff, such as making sure staff are familiar with phishing. If someone wires money to the wrong account or provides account infor- mation due to a low-tech phishing email, that could be very damaging.And most of that prevention is around internal training and awareness.

As investment managers become more efficient at collecting data, do you feel storing and analysing increasingly large amounts of data is becoming difficult?

I wouldn’t say data is becoming increasingly large by the traditional “big data” definition, but it is becoming increasingly disparate. In private debt, we are not yet needing AI type of analysis on the data. However, the market is needing to capture, manage, and standardise an increasingly varied amount of information.

Dealing with that disparate data is difficult but it’s becoming easier. There are issues around the financials, with a lack of standardisation about how firms should report, and you have lots of documents flying around that you need access to, as well as quick access to specific data points within those documents. To me that’s the challenge but it’s becoming easier as there are new products that are trying to solve this by delivering disparate data in a standardised way.

When looking at the different areas of fund management, which do you think is the most dynamic in the context of technology?

Portfolio management is very dynamic as customers want big things from it and it’s highly bespoke.The market has always viewed it as a priority, but it varies from client to client. In that sense, it is very dynamic. In addition, research has been a huge part of what we do and many of the factors are the same as for portfolio management. Clients want all of the data involved in making an investment decision at their fingertips and they want accountability for those decisions. Once the investment is made, they want all of the data needed to monitor the performance of the company at their fingertips as well.

Meanwhile, compliance has been a huge growth segment for us as there are many old legacy systems out there that are no longer meeting the needs of the market.

Transactions and accounting are also a growth area for us as we have a new product that covers both on a multi asset class basis. It’s not an especially dynamic area in general as you have several exist- ing solutions that have  been around for a while. However, this is a dynamic area for us, as having a full front to back solu- tion that can be implemented quickly for small clients and scale and be customised for large clients, has certainly provided a lot of opportunity for us.

How disruptive do you think the impact of technology is on the industry? Does it complement existing processes, or is there a more fundamental change?

It’s both. There is a fundamental change, with private debt adapting in a way that private equity hasn’t. They are building their businesses around new systems. But every firm needs its own special sauce and it’s not the system itself that is that special sauce. It’s, for example, the sector they target, how they report to their investors, how they evaluate credits, etc.The technology has to complement the process they have or the process they want to have. It needs to be adaptable to the way they want to run their businesses and that is exactly what we at Black Mountain provide.