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To “future-proof” private debt investment, how investors are rethinking their investment route

Overview:

We are living in a climate of economic uncertainty, exacerbated by spiralling inflation, high treasury yields, volatile commodity prices, looming recession and a war in Ukraine. Obviously, this seems like a cocktail for potential disaster leaving investors confused around the world. Nobody likes uncertainty and investors would definitely like to be aware of the risks to their portfolio and find solutions to future-proof them.

All asset owners desire a diversified portfolio and often seek new investment avenues which are driving new allocations to alternative assets. However, this would need a sharper focus on balancing risk exposure and liquidity while managing the onslaught of new data to make the right decisions.

As studies by Preqin show, there is a steady increase in demand for alternative assets. The size of assets under management in this space is expected to grow to USD 23.21 trillion by 2026 with private capital AUM expected to compound at an impressive 14.8%.

Dependence on Data:

As they say, Data is the new oil on which the investment engines of the world run. The increased need for quicker investment cycles raises the demand for more clarity and faster due diligence which comes back to the availability of real-time information. Debt funds are quite complex in structure and require multiple data points to be gathered, processed and analysed to manage portfolios. This seemingly complicated process can be streamlined using private debt solutions software. The use of digital solutions will assist private debt firms to arrive at a single source of truth which will help them in portfolio management, quick analysis and improvement in the efficiency of operations.

Need for Data transparency:

The most critical challenge for asset owners is to obtain and manage relevant data while understanding its impact to enable the right portfolio decisions. Investors give top priority to data transparency as it gives them the assurance to manage their risks and invest in an uncertain world. The availability of real-time quality data is a must-have for effective performance and monitoring of risk in the alternative investments segment as a delay can lead to sub-optimal decisions where the actual return could vary widely from the estimate. So, depending on the data source, there is a need to weigh the returns appropriately providing for the lags which will help in more accurate interpretations that can align with the final valuations.

How Digital Technology can help:

Digital transformation is of paramount importance in private debt management as it will enable a real-time inflow of information that can help in making informed portfolio decisions. In a dynamic world, time is of the essence and a digital solution can help to manage alternate investments better.

As the private investment market has grown in size, the need for more relevant real-time information and the availability of data have both gone up manifold. Private fund managers are under pressure to provide more transparency to institutional investors which leads us back to the availability and analysis of data points once again. Investors are no longer satisfied with financial data alone. There is a demand for more subjective information as well like management style, commitment to ESG, consumer sentiment and more. These pieces of information are disparate and come from multiple sources which makes the gathering and analysis of the information cumbersome. However, the benefits of obtaining these data far outweigh the effort as they can help in making informed investment decisions which would be of immense use to private debt investors.

Future-proofing with technology:

Private Debt, as an investment avenue, performs better when there is high growth or inflation. In the current environment. Private debt can deliver interesting risk-adjusted returns which can improve further if inflation peaks here initiating action by the central bank. In case the situation reverses in the coming year, private debt would come under pressure but would still deliver positive returns in real terms. This is where the question of future-proofing investments comes in to protect the downside in the event of unfavourable market conditions.

Technology can help investors to stay ahead and manage their portfolios better by providing real-time information on multiple data points. Modern solutions using emerging technologies can offer seamless links with third-party data systems that can help investment teams to pull relevant information for fresh and active deals in their pipeline. They can also initiate emails, manage calendars and update deal status automatically. With the availability of real-time information at the click of a button, it becomes easier to compare deals and evaluate them. Having critical information at your fingertips is an excellent example of how technology can be leveraged to improve decision-making by offering better deal evaluation and funding processes.

Conclusion:

The need to estimate and manage risks effectively leads to more dependence on data-driven solutions that can help investors in alternative assets navigate uncertain business climates successfully while managing to get superior returns on their investments. The need of the hour is to switch to digital solutions that can gather and crunch relevant data from multiple sources to facilitate informed decision-making in a dynamic and volatile business landscape.

Authored By: Ankur Agarwal (Co-founder & CTO, PE Front Office)