One aspect about adapting to change is that once you’ve made the shift, it’s difficult to remember doing things any differently. A workplace without Zoom calls is almost unimaginable now, and it’s a fair bet that many of the covid-enforced changes embraced by private markets – virtual fundraising, remote due diligence and online investor match-ups to name just a few – will have become so engrained by the time this is all over, that we’ll never return fully to our pre-pandemic ways.
That’s definitely the view of the market participants that Private Debt Investor spoke to for this Fund Services report.
There’s a digital revolution going on as technology platforms are proving their mettle in this time of need, and that is transforming the world of fund administration. Here are five key trends we think are set to reshape fund services for private debt in the coming years.
1. The investor experience is being transformed
Talk to any fund administrator and you get the sense of a brave new digital world emerging that is starting to transform the GP/LP relationship. On a nuts-and-bolts level that means discussions on how data is presented through interactive data – the demand for real-time data is rising exponentially. On an LP level, the changes are even more fundamental, says Keith Miller, global head of private debt at Sanne Group.
Percentage of investors surveyed by PDI that are happy to conduct due diligence entirely digitally
“The investor experience has been thrust into the limelight in multiple ways,” says Miller. “That covers not just the necessity of fundraising activities being done virtually – which has certainly made a significant difference to the way the world operates – but also more interactive, online collaboration and meeting tools to facilitate virtual AGMs, roadshows and CRM platforms to engage with investors. A lot of that is here to stay.”
Managers are looking at the processes that investors see daily – such as redemptions or capital calls – and looking to make those more user friendly. “Everyone wants the same information and they want more information, with investors calling for more up-to-date insight into the assets. To be able to provide something that’s readily accessible to both LPs and GPs is hugely valuable,” says Miller.
2. Due diligence is going virtual
On the legal side, virtual data rooms have long been used for almost all due diligence processes, but the removal of meetings has transformed the landscape for service providers. “Huge amounts of data went online as everyone got to grips with virtual due diligence and virtual investor meetings. People wanted much more granular insight from that data to make up for not being in person,” says Rosemary McCollin, a sales director at Vistra UK.
And it’s not just the data and meetings that have gone digital, but site visits as well, giving rise to reports that some lenders are even using drones for video footage. “The most obvious change to the diligence process stems from restrictions on travel,” says Ted Koenig, president and chief executive, Monroe Capital. “Lenders are relying on video-conferencing to conduct management meetings and facility visits and to produce quality-of-earnings reports. Video calls are used to conduct facility tours and, in some cases, there has been talk about using drones for larger site visits.”
3. Dublin is doubling down as a domicile
Dublin has emerged as the favourite destination for finance firms moving jobs into the EU from London, according to EY, pulling away from Luxembourg in second and Frankfurt in third.
Percentage of investors that would commit to a new manager’s fund without ever having met face-to-face
The trend has been bolstered by a new funds law introducing a partnership structure tailored to the needs of private funds for the first time, with the Irish central bank pledging fast-track approval. The result is a flurry of firms looking to the Emerald Isle for their domicile needs.
“Most private debt managers are no strangers to Ireland, which is already the number one jurisdiction for CLO issuance into Europe with a widely-used regime for special purpose vehicles,” says James McEvoy, country executive for Ireland at Alter Domus. “We are excited about the new limited partner regime, which addresses the needs of the private debt industry and provides a strong option for managers, whether UK or US-based, looking to access the European market.”
4. Fund finance is finding its feet
The growing use of subscription lines credit facilities is one of the notable by-products of the pandemic. Fund finance has been rising in popularity for a number of years but covid-19 has been a catalyst for further growth, says Yuriy Shterk, chief product officer, at Allvue Systems.
“With all the uncertainty created by the pandemic, folks have realised that these facilities allow them to fund deals with certainty, faster than they have in the past,” says Shterk. “In the direct lending world specifically, speed of execution is so important, so GPs need to move quickly once they’ve done their diligence to remain competitive. That’s where sub lines became very important, especially coming out of the pandemic.
“Huge amounts of data went online as everyone got to grips with virtual due diligence and virtual investor meetings. People wanted much more granular insight from that data to make up for not being in person”
“Wider adoption by GPs led to a realisation on the bank side that this was an opportunity to make money in an area that was traditionally viewed as niche.”
Sub lines do have their critics, of course, and have met with some understandable scepticism in the LP community about the IRR and leverage consequences of a greater reliance on banks for funding. New, more “esoteric” offerings are being rolled out to cater to LP preferences, says Ryan Crowell, Allvue’s product manager for private debt, but managers need to tread carefully.
“Adoption going forward will be driven by the comfort of LPs,” says Crowell.
5. ESG reporting is going digital
Investors are placing increased pressure on fund managers over environmental, social and governance issues and there’s growing demand for that data to be delivered digitally.
“ESG reporting is an area that is ripe for digitisation,” says Jocelyn Lewis, executive director, private debt strategy, financial services at IHS Markit. “Portfolio companies are reporting more ESG metrics and investors are asking questions about such metrics more frequently and in greater detail. Given the frequency and depth of ESG reporting, digital tools for organising, analysing and reporting on this information are in demand.”
And ESG considerations are set to move up the list of due diligence priorities for managers and their investors alike as we move through 2021, says Ross Allardice, partner in the corporate practice at Dechert. “There is now a lot more focus on ESG. A lot of sponsors now have their own ESG teams in-house and we have seen a growing demand for legal due diligence reporting on ESG, which is something we have developed over the past year. Funds are really focused on that review as part of their investment committee processes.”