The private credit market in India is on a growth path and several new private credit players have registered with SEBI in 2022. A scenario of rising interest rates, volatile equity markets, and a reduction in liquidity is resulting in increased interest in private credit. With the rising interest in private credit, regulatory compliances are also increasing and hence demands of limited partners pertaining to investment performance reporting of their general partners have been on the rise. The accelerated growth of the sector is forcing a relook at the way the Private Credit/Debt operations function.
Technology is making alternate credit funding a game changer for Indian Investors as it attempts to simplify the otherwise complex investment lifecycle. Technology has answers for all the typical pain points in the life of an alternative investment manager, be it tracking investment opportunities, managing investment cashflows, monitoring portfolio financials, maintaining investor relations, or managing key fund administration tasks.
Alternate credit funding has multiple elements and technology plays a pivotal role in handling the investment process. Deal teams go through humongous volumes of data and spend lots of time and effort to identify the right investment opportunities. However, there’s always a possibility to miss out on good deals due to the delay in data crunching or a broken deal evaluation process. Technology helps in managing the deal pipeline by offering tailored workflows that streamline the due diligence process and enable the investment teams to track the progress of deals at each stage of the pipeline, leading to quicker and more efficient decision-making.
When it comes to Investment Management, the investment teams essentially require support for generating and evaluating amortization schedules, managing cashflows & valuations, and monitoring investment performance. Working this out manually for multiple investments can be a time-consuming, inefficient, and sub-optimal way of operation. Technology helps investment managers to work smarter and faster by automating these tasks. New-age technology solutions offer features that automatically generate amortization schedules based on pre-defined parameters. Technology further allows investment managers to quickly assess portfolio performance by automatically calculating metrics such as IRR and MoC, helping them make the right investment decisions. Additionally, it also facilitates data analysis and the generation of reports at the click of a button.
One of the biggest challenges in Alternate credit funding is the efficient monitoring of Portfolio Financials/KPIs as the returns are highly dependent on the financial health of the portfolio company. Also, the growing reliance on social impact parameters to assess the effectiveness of a business has made ESG tracking an essential task. By its nature, the portfolio monitoring process is effort-intensive and prone to input errors as there can be multiple Excel sheets that need to be evaluated and validated. However, technology can make this process very simple by enabling investment teams to collate all Financials/KPI/ESG data on a single platform. This not only acts as a single source of truth for all stakeholders but also helps in addressing compliance issues by automatically tracking any serious variances and notifying major deviations. Some new-age technology providers have even attempted to automate the process of data upload by offering dedicated investee company portals that allow direct upload of Financials/KPI/ESG data by investee companies in predefined formats, saving an enormous amount of time and enabling investment teams to focus on other value-added activities.
With the boom in the Alternative investment sector, the competition to attract investor eyeballs has also grown many folds and hence Investor relations management remains as essential an aspect as Investment management. At the core, Investor Relations comprise critical tasks like Fundraising, Investor Onboarding, Communication, and Reporting. Having a dedicated technological solution that handles all these tasks makes life easier for the investor relations team. Technology assists in efficiently recording investor information like investor preferences, tailoring the workflow to track the progress of fundraising with prospective investors and maintaining the records of investor meetings. Additionally, technology allows for easy monitoring of essential details like commitments, drawdown/distribution, and investors’ investment performance. Innovative solutions like virtual data rooms/investor portals can help in streamlining investor communication and reporting as they can be used as a common platform for reporting to investors and act as a repository for all investor documents and communication.
Key fund administration activities like fund cost tracking, drawdown and distribution operations, capital call notice generation, and fund performance monitoring are not easy to manage. Typically, these activities are outsourced to external fund administrators. However, technology has disrupted this trend lately. There are various new-age technology providers in the market who offer fund administration solutions capable of tracking fund costs, performing drawdown and distribution operations, and tracking fund performance with automatically calculated parameters like Fund IRR, NAV, TVPI, RVPI, DVPI, etc. Some technology solutions even automate the drawdown/distribution process and allow investment teams to generate capital call notices at the click of a button.
The exponential spurt in data volumes preceding the pandemic and the dynamic business landscape that is revolutionized by digital transformation has forced Alternative Investment firms to wake up and realize that technology has to play an important role in the transformation. Although the Alternative Investment industry has been a late entrant in the digital transformation drive, the obvious benefits are forcing more and more firms to wake up and adapt as soon as possible. It is a question of when and not why as the results are well documented. The sense of urgency is creeping in, and alternative investment firms are moving towards technology adoption that will help them perform more efficiently and stay ahead of their peers in a competitive landscape and this is only expected to increase further over the coming years.
The article has been written by Ankur Agarwal, Co-Founder & CTO, PE Front Office