Integrity at stake as GPs struggle with data science

Fund managers are not taking advantage of modern intelligence tools that would allow them to do more thorough underwriting, says Matthias Kirchgaessner, an external adviser at Plexus Investments.

Are private debt managers prepared for the future?

We did a survey recently just figuring out how prepared managers are overall. We have a big network of different kinds of managers and it was astonishing to see that most people are not adapting to the technology that is already available and out there.

It was striking to see during the panel session we had [at the PDI Germany Forum] that in the audience there was only one guy who had hired a data scientist and was using that for sourcing, the underwriting, as well as for the monitoring.

If you are looking at the different strategies, I would assume it is very important to have a very high number of data points for each kind of company and the people on the board, so you can digest this information and come up with a view, not only of how stable this business might be, but also what kind of integrity the team have. If you are walking around and you have no clue about that I wonder how you can really do the proper underwriting. In short, I am not sure if most managers are equipped these days, although they should be.

Which emerging technology do you think will bring the most disruption to the private debt industry?

If you look from the technology point of view, AI needs to be faced, and seen as a tailwind, not as a headwind. It will become a headwind if you are lagging behind the competition and you believe that your underwriting style is efficient when it’s not. You are missing opportunities as a result.

Which future private debt strategies are you focused on right now?

In terms of the different kinds of strategies, we were shying away from direct lending for the last two years. It is not that we feared the economic cycle, but because the expectation that at some point we will be at the peak and most likely if you are subscribing to a fund now you will be hit by a recession.

Therefore, we like short-term exposure like trade financing where it is fully collateralised. My issue with direct lending is not knowing in what kind of cycle we will be in when we exit, and principal comes back. On the other hand, I would rather invest in distress and have capital committed to distress thinking that there will be a distressed cycle coming along. However, we are not going with the big guys. You have to look for smaller managers who dive into sectors that they really know and can apply capital along the way and you don’t need a distressed cycle.

How are you taking advantage of new innovations and technology in your organisation?

We have a data scientist employed, who is a quant by training, and he can program and use Python. If you allocate capital to liquid equities, our assumption is that in three to five years’ time it will be dominated by AI managers. That means you have to step up and understand what kind of technology it is out there, and how it is applied by managers to achieve better results than any active manager, or at least better than an ETF. If you are not doing this research now, then you are just behind the curve.