Private debt fundraising is tracking moderately ahead of 2022 and is likely to exceed $200 billion for the fourth consecutive year according to data from Pitchbook. In terms of share of private capital raised in the first six months of 2023, private debt funds took a record 19.7%, up from 15.6% in 2022.
This rapid growth is providing a fertile environment for the application of new innovative technologies including artificial intelligence (“AI”) enabled workflows.
To set the scene, when talking about AI in the asset management servicing space, we are not yet at a stage where a friendly robot with a quirky name will produce a fund’s financial statements while pulling out the latest ESG performance KPIs and drafting the minutes for an upcoming next board meeting. As in other sectors, the adoption of AI-based tools is still a gradual process and represents the next phase in the industry’s evolution, not an overnight phenomenon. For many years, loan administration and fund accounting software platforms have replaced Excel, to enable the next generation of financial performance statements at asset, portfolio, and fund levels. These are becoming more user-friendly, with an emphasis on the quality of the dashboards and their ease of access through client facing portals.
Opportunities
AI has the potential to transform the way that funds operate. Repeatable tasks following a replicable, predictable process (such as daily, monthly, or annual reports) lend themselves well to the use of AI. For example, the financial accounting process that leads to the production of the financial statements of a Fund is a good use case. That said, the growing complexity of fund structures means that the reporting process is increasingly bespoke. It is possible to envisage a future for the industry where AI will be routinely leveraged for straightforward and volume-based processes.
The private debt industry is open to the clear benefits of these new technologies including the potential resource efficiencies, as well as improved speed and reliability. Apex Group’s clients also place value on a managed platform, which offers the ability to access the underlying technology platform through an outsourced service partner, rather than facing the high initial cost of buying a software in-house and being left with the troubleshooting.
Challenges
As with any computer-based tool, the output will only meet quality thresholds if it is accurate. Poor data inputted into a system, no matter how sophisticated, will mean poor data is generated as the output. In private debt, low-quality data outputs are not actionable for decision making. The private debt industry players all face the same challenge, which is to make sense of gigantic amounts of data. It is the abundance of data, not its scarcity, which is the challenge for the next phase of innovation. Integrating data from a variety of sources, and then using advanced analytics to make sense of the data will be driven by machine learning, natural language processing tools enabling us to make sense of the over-abundance of data and generate actionable insights.
The adoption of AI and machine learning only makes sense if data is easily accessible with the unified data platform’ (“UDP”). Using data in a meaningful way presupposes simplicity of access, hence the growth of unified data platforms at the company level.
Another challenge is to think that AI means no need for human intervention. Most if not all the optical character recognition (“OCR”) tools still require human intervention for constant calibration before the tool has achieved the level of confidence that justifies using it in the first place.
What next?
Private debt managers need to ensure they are not swept up in the ‘hype’ or buzz around existing new technologies such as AI. They need to be clear about what they are trying to achieve and ultimate what goals are driving their technological requirements – now and in the future.
Before investing considerable time, resources, and money in a few platforms, managers should ensure that understand the level of control they want on the technology platform as this will dictate the amount of human capital and financial resources required in-house. An outsourced model makes sense for organizations that are keen to scale up quickly, with the flexibility afforded by being able to access a choice of technology platforms. Many private debt investors looking to harness the benefits of new technologies are now seeking to partner with a technology-enabled provider, such as Apex Group which will allow them to tailor the technology, they require to support their business in this fast-growing asset class.
To find out more, please contact the team.
