In our recent blog post ‘The rise of loan investments - Why the change in course’, we discussed the key drivers behind the rise of loan investments. This blog will focus on the next steps; how can firms’ operations support debt instruments without incurring unacceptable cost or risk?
Navigating new investment strategies is challenging. Many firms that historically delivered their clients’ profits through conventional asset and derivative investments are now moving towards more complex debt instruments. Diversifying into such new investment strategies (e.g. the purchase and/or issuance of loans) requires asset managers to rethink their operations and middle-office processes.
Research conducted by the Alternative Credit Council (ACC), an AIMA-affiliated offshoot and global body representing the interests of private credit and direct lending managers, found 45 percent of respondents operating in the loans space said regulatory and client reporting was their biggest challenge1. Another 45 percent of managers said that limitations in their current technology made it difficult to accurately track loans2, a problem that can result in substantial investment and operational risk. In addition, such assets have complex settlement processes which call for a deep understanding of the industry.
The pace of technological change today is unprecedented. Legacy technologies and outdated systems will struggle with the complexity of this new asset class which demands significant investment in processes undertaken by experienced personnel with an in-depth knowledge of credit and borrower risk. Creating an internal system capable of running administration, valuation and reporting of loans in-house is extremely costly, time-consuming and substantially difficult to future-proof. Firms are already inundated with client reporting requests and the cost of regulatory compliance. Carrying out loan administration activities internally is an extra challenge that many managers simply do not have the time and resources.
As more and more fund managers realize this, growing numbers are engaging third parties to manage some or all of their loan administration activities. The ACC study found 48 percent of managers outsourced loan administration while only 30 percent contracted out their regulatory reporting to third-party vendors3. By outsourcing day-to-day activities and administration, firms can direct resources and capital to revenue-generating processes.
SS&C’s whitepaper “Credit Funds – The Growth of An Asset Class,” looks further into the drivers and impacts of increased investment in credit funds – and how firms can set themselves up for success. SS&C Loan Services supports bank loans, residential whole loans, direct lending and mortgages, delivered by a team of product specialists with over 20 years of experience. SS&C services $400 billion of loan assets across 300 clients including asset managers, banks, and insurance companies. Its offering includes a comprehensive suite of technology and outsourced services across the entire loan spectrum, including loan closing (including LSTA and LMA terms), portfolio compliance, accounting, reserving, credit risk analysis, middle- and back-office administration, agency or shadow servicing of commercial and residential mortgages and bank loans.
1 ACC – Enhancing the loan administration function
2 ACC – Enhancing the loan administration function
3 ACC – Enhancing the loan administration function
