Alt Credit Intelligence - Systems, operations, transparency and trade reporting

Rob Shaw, CFO at Apera talks to Alt Credit Intelligence about how getting operations right first time is key to growing a pan-European brand 

Apera may be a relatively new fund manager, but it has teamed up with established players in the fintech space to create an operational and trade reporting system to rival the biggest players in the private debt industry, as increased investor appetite is beginning to lead to increased operational demands on this rapidly growing industry. 

The demand for private debt strategies continues to grow through 2017 as LPs diversify their allocations in favour of alternative strategies. Q1 2017 European fundraising for direct lending funds surpassed $9bn, nearly twice the amount raised in all of 2016 ($5.4bn) according to a recent Deloitte report. Investor appetite has also been matched by returns, with a recent poll by Preqin resulting in more than 90% of investors stating that private debt returns met or exceeded their expectations, with 62% planning to increase their allocation. 

At the same time, investors have taken a much more data-driven and detailed approach to their allocations to this maturing asset class. Lessons learnt from investing across other alternative strategies, such as hedge funds and private equity funds, as well as investor expectations around similar reporting for fixed income products, have meant that managers are being asked for a greater transparency beyond the fund level. This is also driven by recent regulatory changes, such as Solvency II. Ultimately, the challenge presented is how to integrate, reconcile and report on data generated across three areas: fund data, instrument level data and operating company data. 

In a recent survey conducted by fund administrator SEI, investors were asked which selection criteria is rated as very important – portfolio transparency was rated vitally important to 50% of all investors surveyed. 

As a new fund setting up our own infrastructure, we have focused our attention on the following areas: 
• Data integrity and transparency
• Process organisation from a compliance perspective: a single repository for non-disclosure agreements, loan eligibility tests and investment committee minutes, which eliminates the need for separate departmental approvals
• Timely reporting: investment sourcing and decision making, settlement, investment monitoring and investor reporting

To do this, we have put technology at the heart of Apera’s operating model. Although we benefit from not having legacy infrastructure, by building our platform from the ground up, we have been able to create a scalable and institutional infrastructure from the outset. It is for this reason Apera decided to spearhead the launch of an integrated, technology-led, fund-management platform in partnership with software developer Black Mountain and SEI. The platform will allow Apera to set a new standard in the timeliness and transparency of reporting that investors are now demanding. 

Black Mountain will provide an end-to-end solution for loan origination, funding, portfolio management and investee company financial information. By capturing this information in one database, Apera will be able to accurately monitor and control each investment during its lifecycle. SEI will provide an end-to-end solution for fund administration, loan administration, investor reporting, and investor compliance, leveraging SEI’s operational and technology platform, which provides unparalleled insights into fund and portfolio data for fund managers, their investors and relevant intermediaries. The combination of Black Mountain and SEI’s technology will allow any errors or omissions to be quickly rectified by looking through to the underlying transaction level data. This is done via an automated weekly reconciliation of loan data between Black Mountain and SEI. This independent verification and control over such crucial information enables errors or omission to be identified and rectified in short order. 
Although it is tempting for managers to wait until fund two or fund three to roll out the necessary systems to improve the overall quality of reporting, and manage ever increasing volumes of data, this approach presents its own challenges further down the road. Traditional systems are often unable to cope with the complexity of launching a fund, particularly for pan-European funds with a multitude of jurisdictional, structural, legal, tax and regulatory considerations. In fact, without the right systems in place at the beginning of the fund’s life, many managers will find it difficult to deliver on the instrument level detail required by changing regulation. As me ntioned, regulatory developments such as Solvency II, the new regime for the prudential regulation of European insurers, imposes data reporting requirements for insurance company LPs that will typically pass this on to fund managers. 

For many years, hedge fund managers have put technology at the heart of their business, particularly those with more liquid strategies. Private debt fund managers can learn a lot from the daily operating model employed by those in the hedge fund world. Although transaction flows in debt funds are by no means daily, building systems that can cope with higher transaction volumes is critical.

As a new manager, we aim to act as a solutions provider for both our investors and portfolio companies. From an investors’ perspective, being able to work with different fund structures across several jurisdictions is key. For example, a larger investor may ask us to set up a separately managed account in US dollars. Aside from the increase in operational complexity through the establishment of special purpose or blocker vehicles, we will also need to ensure that the foreign currency exposures are appropriately managed. To ensure that investors receive the level of transparency they now expect, managers must have the appropriate systems in place to guarantee accurate reporting – there is no longer a one-size-fits-all approach. 

The key to effective and efficient pan-European investment origination is having a local presence in each relevant geographic area. With this in mind, Apera intends to open offices in Paris and Munich. This affects the choice of both technology and operations from an infrastructural perspective, as managers look to provide their teams with up-to-date fund, investment and investor data, irrespective of where they are based. By working with Black Mountain Systems, we have direct access to a cloud-based platform, where we are able to review the latest deal pipeline or review portfolio company financials, whenever and wherever we want. 

Making the right choice of systems and selecting the right operating partner is critical for both established and new managers to deliver timely and transparent reporting and comply with the increasing regulatory reporting demands from Solvency II. Apera has developed a cloud-based platform with Black Mountain which combines loan, fund and portfolio company data in one seamless integrated platform, that through its combination with SEI will create a new standard of reporting for alternative asset managers.