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Transformative technologies… in private debt?

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In 2017, investors allocated almost USD120 billion into private debt funds, on the back of approximately USD100 billion being raised in 2015 and 2016. To better understand the context into which investors are deploying such large amounts of capital, SEI and Preqin conducted a survey of private debt fund managers in mid-2018. 

In 2017, investors allocated almost USD120 billion into private debt funds, on the back of approximately USD100 billion being raised in 2015 and 2016. To better understand the context into which investors are deploying such large amounts of capital, SEI and Preqin conducted a survey of private debt fund managers in mid-2018. 

The results, to be published in the soon-to-be-released paper “Private Debt: Preparing for the Unknown”, revealed far reaching implications about key considerations for managers to take into account as they look to develop strategies to take advantage of the opportunities a shifting investment landscape and newly developed technologies offer.

Managers are making adaptations ranging from building out niche lending strategies and the construction of portfolios customised to investors’ particular risk preferences, to employing advanced data analytics which allow greater operational efficiencies and improved resilience. 

In many respects private debt, just like private equity, is still a very traditional, people-focused business where fancy algorithms play little or no role. This is all about sourcing the right companies to partner with and creating highly bespoke funding programmes that no algorithm can realistically produce…yet. 

That said, SEI’s survey seems to suggest that investors are more forward thinking about the likely impacts of technology than managers. Half of all investors think advancements in data analytics will spur the development of more customised investment vehicles within the next two years, while 57 per cent think data analytics will soon permit more types of investors to participate in the private debt market. 

Managers are more sceptical – citing the need to understand the collateral of a particular company, and how it operates (day-to-day), along with managerial and humanistic factors more suited to subjective appraisal. Data analytics might be good for analysing credit scores but managers note they are of limited utility when evaluating the nature or behaviour/culture of the borrower. 

There are also multiple barriers to entry in terms of employing data analytics in the private debt space. There are tight controls on how data is shared within the private debt space, typically confined to a small network of managers and investors, which limits the ability of machine learning applications. 

Still, there are now many new sources of alternative data sets and new technology platforms (such as CEPRES, which gives institutional investors a way to benchmark private capital market investments) that could open the door to further innovation in private debt and deepen the capabilities of data analytics. Machine learning tools are only likely to get more powerful over time, after all.

On the data analytics point, Ross Ellis, Vice President and Managing Director of the Knowledge Partnership in the Investment Manager Services division at SEI, comments: “The possibilities of more sophisticated uses of data in this industry are indisputable, but as we saw with hedge funds a decade ago, we’ve noticed allocators are the ones more likely to step back and take a big picture view of ways the industry might stand to be disrupted.”

Beyond data analytics, almost one third of investors surveyed by SEI felt that fintech advances, such as the rise in prominence of peer to peer lending platforms, are a disruptive phenomenon that could displace traditional funds in the private debt market. 

With a growing percentage of assets – and talent – locked up by a small group of mega-lenders, today’s private debt market gives every indication of being a stable, orderly, secure corner of the asset management world. But potentially disruptive technology is knocking at the door. 

Traditional lenders in the form of banks remain on the sidelines. Meanwhile, thousands of hedge funds are launching lending products. Will all of these parties be able to co-exist? Will innovation flip the script? Where are the opportunities for managers in a market that is becoming undeniably more competitive?

Over the last decade, total AUM in the private debt space has ballooned from USD245 billion in 2008 to almost USD667 billion. These numbers are projected to double again by 20231.

The numbers are compelling but there are no guarantees that managers who launch private debt vehicles will be tomorrow’s winners. This remains a highly specialised and complex asset class. One of the clear findings to come out of SEI’s survey is that while the opportunities are evident, the way mangers are able to differentiate themselves will be essential to their longevity in an indisputably ‘hot’ space. 

The survey found that 71 per cent of GPs felt that those who can demonstrate specific sector expertise will be best placed to meet demand over the coming years. Others prefer to emphasise unique expertise in underwriting and sourcing methodologies. 

Specialisation could relate to geographic expertise in specific markets or situations, it could relate to more niche sectors such as aircraft leasing, as well as emerging applications of technology, as managers move away from direct lending and explore asset-backed deals featuring non-traditional assets such as royalty streams. 

Blueprint Capital Advisor’s Catherine Beard states in SEI’s report: “We believe that teams that have worked together, with a particular expertise in their sectors, tend to drive more alpha over multiple cycles… it can be a little dangerous for a generalist analyst pool to move opportunistically across a number of different areas.”  

Whereas private equity sponsored deals have driven much of the growth in private markets as GPs have stepped in to the void created by banks, non-sponsored loans are a growing part of the picture. In Europe, for example, non-sponsored loans accounted for over a third of overall loan volume in 2017, compared to less than 20 per cent in 20072.

According to SEI’s survey, two thirds of GPs believe that small to mid-sized private companies with no sponsor backing (i.e. PE sponsors) will be the greatest source of demand for private debt over the next five years. However, there is a potential risk that bank deregulation and interest rate rises could stymie the ability for managers to succeed. 

The survey also revealed that Asian investors tended to have the largest allocations to private debt as a percentage of their overall portfolios, allocating 5.9 per cent on average, compared to 5.5 per cent for European investors and 3.8 per cent for North American investors. Institutions from South Korea and Japan have some of the most notable mandates at Private Debt, though like their neighbors, have indicated more appetite for mezzanine and special situation strategies versus direct lending ones.

Given the level of interest among Asian investors, private debt sponsors might feel emboldened to tap in to the region, if they have the stomach for taking on the risk of potential geopolitical reversals.


Read more about private debt industry trends, challenges and opportunities in this SEI white paper. Select preferred format: US/UK




1: Preqin, “The Future of Alternatives,” October 2018.
2: S&P Global, “EMEA Private Equity Market Snapshot,” Issue 17, Figure 8, April 2018.




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