Automation is critical to modernizing the loan market
April 27, 2023 | Steve Sulecki | SS&C
With institutional investors allocating to debt funds in growing numbers, it’s not surprising private equity and hedge fund managers are interested in diversifying into this sector. However, they are navigating significant operational and accounting challenges.
Despite the growth and sophistication of the loan market, it is still largely paper-based and dependent on manual processes. Loans are arguably the most complex asset class for accounting and reporting. Loan facility documentation is often unique to each lender and the structures, terms and covenants are often highly tailored to the borrower. With little standardization and few opportunities for automation, firms find it challenging to achieve processing efficiency and speed to make the business scalable and profitable.
Portfolio accounting systems built for traditional equity or fixed-income investments cannot handle the many moving parts associated with a bank or private debt. Firms often resort to spreadsheet-based workarounds to calculate the valuations of their loan holdings and allocate payments to investors. This manual process is inefficient, time-consuming and increases the risk of errors. Even firms tracking their loans in investment management systems struggle to gather the data points required to formulate positions on trade dates. While these details may be available in the credit agreement, it entails parsing large amounts of information to extract the correct data elements required by the system.
