BNY, one of the world’s largest alternative asset servicing firms, was named the winner of the ‘Custodian Service of the Year’ Category at the 2024 Private Equity Wire European Credit Awards. Elliott Brown, Global Head of Alternatives for Fund Services, outlines some of the challenges and opportunities in the private credit space.
How is the shifting interest rate outlook affecting the private credit market?
Interest in private credit has increased over the past few years as investors sought new ways to achieve income/yield amid a low-rate environment. Rates may be higher today, but we are seeing interest in this asset class continue to grow. Traditional as well as alternative managers are launching new private credit products, many targeted at retail investors. It is one of the largest asset classes driving the growth of “registered alternatives” such as European Long-Term Investment Fund (ELTIF), Long-Term Asset Fund (LTAF), interval funds and Business Development Companies (BDCs) an area where clients often look to us for insights.
What are the most effective due diligence strategies and processes available to private credit funds?
Careful consideration when selecting an administrator and continued oversight are some of the most effective strategies. Administrators come in all shapes and sizes. Some are specialists in a client type or asset class, others are more generalist, supporting most clients and asset classes. New players entering the market need the capital to invest in systems and technology so that they can service the complex asset classes and fund structures — as well as hire experienced staff.
BNY has a rich history of providing solutions for credit and loan managers, administering more than $250 billion in credit fund assets and nearly $700 billion in loan assets, and processing more than a million loan trades each year. We’re well equipped to consistently support credit managers across both private and public markets, which is a challenge many managers grapple with as these markets have begun to blend. Longevity in the industry also means we’re constantly looking at trends to identify areas of growth to better support our clients.
Finally, administrators can provide reporting to assist funds and their managers in carrying out their ongoing due diligence. Reports can cover fund performance as well as show how well the administrator performed tasks. On-site visits and compliance questionnaires are also used by many managers.
How are LP Limited Partner (LP) demands and expectations evolving when it comes to private credit?
Clients need specific, highly curated data sets. Sophisticated tools are also necessary to calculate returns consistently and in a way that can easily be reconciled and communicated to investors. Enhancing accounting data with analytics and market data is increasingly in demand, with clients wanting to receive that data in a format their systems can ingest.
Clients leverage this data for their own reporting needs and to ensure their administrator’s data matches their systems. Some want to perform the reconciliation themselves as part of their oversight function, while other clients want companies like ours to do it for them.
Expanding on the above, what are some of the biggest data challenges faced by the private credit sector?
The sector relies heavily on PDFs and emails as a means of communicating information to investors, between managers and service providers, as well as between service providers themselves. Many companies today, including BNY, are investing in systems that obtain the data from PDFs so it can be ingested into our systems. We are also investing and working with many of our counterparties on long term solutions, where data is exchanged directly with each other. One area of exploration is to leverage distributed ledger technology to exchange data more efficiently.
What role does technology play here?
You need to have best-in-class systems. By that, I mean robust systems that automate processes and that are integrated, which means greater efficiency, less risk, and the ability to scale as needed.
It’s also not about one system. You need the right system for the task you’re trying to complete. To service the loans industry, you need specialist tools. Do you have the right accounting and administration systems? Can you provide investors with the level of transparency they need? Can you produce accurate and timely reporting on different instruments and time frames? Is it integrated? It’s one thing to have a single system that can manage one aspect — say the administration of loans — but can it also “speak” to the accounting side to deliver a complete administration solution for a credit fund? This is where we at BNY believe we offer clients a real advantage.
