Financial technology is pushing forward in ways that are of special interest to debt fund managers. Below are some of the key ways in which it’s impacting portfolio decisions, investor relations, risk management… and something a little more exotic.
Passive and active investing: New choices
Vanguard pioneered passive investing in the 1970s, and ended up changing how the financial world thinks about the range of portfolio choices. Fintech has recently advanced to the point where private debt provides space for Vanguard-style passive investing.
The push of passive investing into the private debt world is represented by Israel-based NewVest. In May, the firm launched the Private Debt 50 Index Fund, its second product: the first was a private equity index fund launched in January. The PD 50 still has the air of a new experiment. Of course, if it works it will be copied, as was Vanguard founder Jack Bogle’s innovation. How well will this experiment work? Edward Talmor-Gera, the founder and chief executive officer of NewVest, cautions that it will be some time before performance numbers exist.
Talmor-Gera acknowledges that thus far NewVest has made only institutional offerings, but he does aspire to provide retail offerings in the near future. In the US of course, “these must be qualified purchasers only”.
Meanwhile, when it comes to active investment, new platforms also open new choices. CapX, a digital platform founded in October 2017, connects mid-market borrowers and lenders. Its founder, Rocky Gor, says: “A debt manager has two key jobs: find the right deal and manage the risk. CapX supports especially the first of those jobs. CapX can bring you in on a deal that otherwise wouldn’t have been on your radar at all.”
Investor relations/compliance
In 2016, Wade Girard and his nephew, Derrick Girard, created a company that would devote itself to software innovations for the financial adviser market, called ionLake.
At this time, FINRA prohibited text communications between advisers and investors unless there were processes to save copies of their messages. This is a sensible precaution from the point of view of transparency and compliance, but it seemed a nuisance as handheld devices became integral to 21st-century business practice.
In 2017, both ionLake and a much larger concern, CellTrust, brought out apps designed to help financial advisers use such devices in compliance with the rules. CellTrust came out with SL2 and filed for patent protections: IonLake with MyRepChat.
Two years later, CellTrust sued ionLake for breach of its patents. It seems to have failed to provide ionLake with actual notice of its patents before doing so.
In a jury verdict in May 2023, the jury found both that ionLake had not violated the patents and, of more sweeping importance, that the patents CellTrust claimed were invalid.
The success of ionLake (thus far) in defending this matter illustrates both that such battles can be won and that they have to be fought, with concomitant expenses incurred, because fintech remains a litigation landmine.
A brief history of risk management
In the early years of the 21st century, a single number, the value-at-risk metric, was at the heart of risk management. Risk management techniques have evolved a good deal since and a fair amount of coding ingenuity is now devoted to the task. In a recent interview, David Spreng, the founder and chief executive officer of venture/growth lender Runway Growth Capital, spoke to the issue of fintech in risk management. He described Runway as “medium tech”.
Asked to expand on that, he said: “We use our proprietary methodology for assessing and monitoring risk. Our risk-assessing systems involve hundreds of different metrics. It is mid tech, though, in that it uses Microsoft Excel for this. We require no proprietary software programme.”
A final word: Synthetic data services
Something more exotic than any of the above has arisen out of artificial intelligence research: the development of synthetic data. Whether synthetic data services will find a place in the private debt world is yet to be determined.
Synthetic data is data algorithmically generated that approximates original (real world) data. Why not just use the original data? There are various answers to that question. Privacy obstacles are one.
For example, an extensive database of debtors and their defaults may be worrisome on privacy grounds. Statisticians can, in principle, work up a virtual population of debtors that parallels key statistical features of the real one and has the same predictive value.
According to a report from S&P Global Market Intelligence, there are “a number of prominent startups [that] have emerged to drive growth” in what is still an “embryonic space”.
Alter Domus: Bringing it in-house
A fund manager or administrator, considering technological issues, can end up making a range of build-buy or lease decisions
Should a certain valuable platform or service be developed in-house? Is it easier to buy a niche firm that has proven its value in doing that sort of thing, expanding the ‘house’? Or is it better simply to access the necessary capability via an independent contractor?
Alter Domus, a Luxembourg-based fund administrator and services provider, is an example of an enthusiastic corporate occupant of the “buy” portion of that spectrum. It has expanded its house with repeated purchases of late, buying Credit Vision Limited in December 2020, Strata Fund Solutions in January 2021, Investors Economic Assurance in June 2021, and Solvas this May.
Credit Vision offers a platform that automates data extraction from issuers’ financial reports and channels it into the appropriate data rooms, folders and files, largely (as Alter Domus’s website explains) so that portfolio managers can better “monitor and analyse their portfolio, assess credit risk early and capture new investment opportunities”.
Strata was a Salt Lake City-based portfolio company. When the purchase was announced, Alter Domus praised the “complementary technology stack” it was acquiring, including “best-in-class third-party information processing engines such as Investran, eFront, Allvue, and Yardi”.
Investors Economic Assurance brought with it two proprietary tech platforms, CapAssure and CapAdministration, that complement Alter Domus’ technology stack. The IEA platforms assist with LP waterfall calculations and GP carried interest allocations.
Solvas, previously owned by Deloitte, is a loan and debt servicing software platform and services suite. Most of Solvas’ professionals have been added to the data & analytics unit at Alter Domus.
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