Predicting the next decade: The need for external expertise

Debt funds require more specialist know-how, accelerating the appeal of service providers

The trend towards outsourcing has accelerated across private markets in recent years, but a particular surge is now anticipated in the private debt space. “Private debt funds have become more complex, requiring specialised expertise and technology to manage operations,” says Marshall Saffer, global head of funds service line at Intertrust.

As private debt funds make more loans with bespoke terms, for example, loan administration and loan agency outsourcing needs continue to rise. “Furthermore, the regulatory environment for private debt funds has become more stringent, requiring specialised compliance knowledge across jurisdictions,” Saffer adds.

“Finally, investors are demanding greater transparency and more frequent reporting, which can be challenging and time-consuming for fund managers to handle in-house.”

Meanwhile, as technology progresses, outsourcing providers will be able to offer more sophisticated and cost-effective solutions, further driving adoption of outsourcing in the private debt industry. Indeed, in addition to outsourcing back-office functions around fund administration, private debt funds are increasingly outsourcing technology infrastructure support, including data management, cybersecurity and disaster recovery.

Direct lending, distressed debt, mezzanine and special situations strategies also require significant administrative work to track payments, notices, rate changes and distributions. Loan administration for the investment portfolio is another area where outsourcing is on the up.

“I think the outsourcing trend will continue to grow, and not just with fund admin, but for the entire operational platform required for private credit,” says Greg Myers, global sector head, debt capital markets, at Alter Domus.

“From trades capture and portfolio admin to compliance and overall position tracking, the ability to link internal investment decision-making with ongoing insourced and outsourced operations will be paramount for asset managers, not to mention all the data requirements for investors, regulators and other constituencies that outsourced service providers now support.

“Investors are demanding greater transparency and more frequent reporting”

Marshall Saffer

“Daily portfolio and cash reporting combined with credit oversight and metrics will become the norm for service providers.”

One of the key drivers behind the outsourcing trend is the proliferation of regulation. This is poised to continue. The US Securities and Exchange Commission’s vote to adopt amendments to Form PF is just the latest example of regulation that is increasing reporting requirements and putting additional operational pressure on private debt funds.

“Given the increased regulatory requirements for many jurisdictions, it makes sense to seek out service providers to support certain functions and the resulting regulatory filings, given their ability to scale and standardise their processes,” says Myers.

The other critical factor affecting outsourcing, of course, is the rate of technological change that is infiltrating the asset class. “As technology advances, it is becoming increasingly difficult for private debt funds to keep up with the pace of change and maintain the necessary expertise and resources to manage technology-related functions in-house,” Saffer says.

For example, the use of cloud computing and other advanced technologies has become even more important for private debt funds to manage their operations efficiently and effectively. However, many funds lack the in-house expertise and resources to adopt and manage these technologies themselves, leading them to outsource these functions to third-party providers.

Private debt fund managers, in particular, need to manage loan data in addition to fund data.

“Building a technology stack in-house that allows for transparency and full connectivity across the fund structure is time-consuming and expensive. Keeping all that technology up to date with current standards will only add to the cost,” Saffer explains.

“With the development of open APIs and other tools, opportunities to strategically outsource technology will grow.”