Unlocking Liquidity in Private Credit: Why Integrated Operations Matter

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Christy: Hello, everyone, and welcome to today's webinar, "Unlocking Liquidity in Private Credit: Why Integrated Operations Matter." My name is Christy DeMaio Ziegler, and I will be your host from the CSC Webinar team.

Joining us today is Marshall Saffer, Shashi Shetty, and Joseph Laskus. Marshall is a strategic and operational business leader with demonstrated success in launching, growing, and managing software and service companies. Shashi is the head of Credit Operations for the Fund Services Group at CSC Global, based in New York, with over 23 years of experience in servicing alternative investments. Joseph is a director in CSC's Fund and Capital Markets Division, overseeing the Americas loan operations and the technology supporting CSC's service offerings.

And with that, I will hand it over to Marshall.

Marshall: Thank you so much, Christy. We're going to spend the next 25, 30 minutes or so talking about private debt, private credit, and operations and loan services. From an agenda standpoint, these are the topics that we'd like to cover today. We're going to talk about private credit's rapid growth, the case for integration regarding admin and agency and how they might be considered to be bundled together or whether you should run them separately, unlocking liquidity by using a named loan agent, a few case studies in terms of optimizing the credit operations, and we'll end with a few questions. So we're hoping to have a very good webinar with you.

I'm going to start by just going over some high-level information. This information was derived from some studies that are market-leading, which is typically the Bain and the McKinsey.

What we're seeing is there are some key drivers when it comes to private credit, which include bank retrenchment, demand for flexibility in financing, private debt to finance LBOs, market dislocations, and opportunistic lending. In terms of historical private debt growth, Preqin has got some interesting stats. We're seeing a very large growth in terms of business. I think uniformly everybody can agree that just seems to be one of the major areas of growth in the asset-management space. And with that, is coming some operational pain points for managers as they try to either launch, manage, or grow these private credit businesses in terms of multiple vendors, data silos and reconciliation, complex closings and compliance, and essentially threats from an operational drag and reputational risk if things are not put in place correctly or running efficiently.

Joe, do you have anything to add? I'm kind of curious in terms of what your take is in terms of the growth over the last decade, and if you could break down any of the key structural trends that you think are driving this momentum.

Joseph: Yeah. Thanks, Marshall, for that. So what I see is that private credit has surged over the past couple decades, especially as banks pulled back with their lending post 2008. So because of this, that's created a bigger space for non-bank lenders to meet growing borrower demand.

Also another one is institutional investors are quite hungry for the yield and the downside protection. So this has overall increased allocated capital to the asset class. It's attracted in a lot of the floating rate structures and stable returns.

Also, at the same time, private equity firms and private equity is quite in demand and flexible. And because of this, there's a lot of new tailored financing solutions, which has cemented private credit as a core component for the modern capital market.

Marshall: Okay, it makes a lot of sense. And Shashi, with this growth, what do you see are the main operational bottlenecks that are arising as credit funds scale, particularly across the fund and loan life cycle?

Shashi: Hey, Marshall. So what all I see is challenges in three or four categories. Primarily with data, data is generally not within fragmented and non-standardized for loans. Most of the workflow is manual, and it is limited to automation. And even if automation is attempted, it's a significantly heavy lift. And also complexity. These are the three main drivers of complexities and challenges and bottlenecks for maintaining a loan portfolio. And then there are compliance and regulatory requirements and limited transparency that add to the problem overall in terms of servicing the loan portfolio and of a private trade portfolio efficiency.

Marshall: Okay, that makes a lot of sense. It's just to talk about some of the core functional aspects of running this type of business. And Shashi, I thought you might want to talk to some of these since this kind of resides in your skill and expertise in terms of what you do every day. So do you want to run through this?

Shashi: Yeah, definitely. Well, so overall the first function is obviously about managing the participation of the fund in the loan itself, which means that you have to ensure and take care of the entire life cycle of the loan and also the fund's accounting and bookkeeping function. Then afterward, we also have to ensure that we have complete end-to-end agency function, which will help us to have an integrated workflow.

Then comes the loan administration part, which is very important for managing the life cycle of the loan. As Joseph said earlier, the complexity of loans adds to the overall problems and the challenges to maintaining a portfolio. The right skill, right technology, and the right data set is most important for us to manage the overall workflow and the life cycle of the fund. And then there are challenges of SPV management, technology and data, and oversight and governance that helps us to manage the entire life cycle.

Marshall: Okay. So in terms of all of these tasks, I think there are two ways we can look at it. There are certain people that will say, "Hey, I can do this all myself." And there are other people that say, "You know what? Maybe I should work with a service provider," like ourselves, "from an outsourcing standpoint." What are the benefits or cons of both of those approaches before we move on to the next slide, Shashi? Like do you have any take on that?

Shashi: Yes. I would say the number one comes into my mind is leverage the talent which a service provider may have. And generally, the way the data works is it’s all skewed towards either a quarter end or a month end which means that you need a heavy set of resources on a specific short period of time, which a firm like a specialized service provider can offer you, which will help you scale down or scale up resources as and when the volumes increase or go up or it comes down. And then also, adds to help manage the complexity. As Joseph stated, no two risk structuring on a loan are the same, and no two scenarios are the same. And no two loans are the same. So then you need to have a complete understanding of all the complexities and the different structures that come across in the life of an asset class.

Marshall: Okay. That makes a lot of sense. So as I move on to the next slide, we're big proponents here at CSC in terms of the case for integration. And so when we talk about integration, Joe, and we talk about integration, Shashi, these are essentially the key high points. Is that correct?

Shashi: Yes. I would say the best case for integration is to have a seamless coordination between a loan agent and a loan administrator. Right now, most of the communication between an agency and an admin happens through a form of a notice, which is issued through email in a PDF form. When agency and admin is managed at one single service provider, there is seamless flow of data between the agency and the admin function, which helps to have a better look at a more reliable and consistent data book for faster response time.

Marshall: Okay. No, that makes a lot of sense. In terms of the next slide, Joe, this kind of sits in your world. Do you want to walk through the integration of the administration and the credit operations and talking about how we handle this?

Joseph: Yeah, absolutely. So I think one thing I want to mention is that fragmented operations would mean that your fund admin, loan servicing, and agency functions are all handled by different teams, systems that don't always talk to each other. So it's okay to have things handled by different teams. It's okay to have different technology suites. But it's always about the communication. Can we use any type of APIs? Can we flow a certain type of data between the two systems?

So it's really all about cutting down on the delays, cutting down on miscommunications, and really trying to make sure that there is no extra manual work. I know that we all love Excel spreadsheets. I know that that is our go-to. But let's cut that down. You need checks and balances. You need audit controls.

So in our case, with our proven systems that we have, we utilize Wall Street Office and Advent Geneva. Both of these systems have the capabilities for API integration. Both of these systems have the capabilities for data input and output, where it can go into different forms, different utilities and can be uploaded into different applications. That's key when selecting your administrator and your agent. You want to make sure that the systems that they're using are sophisticated enough in order to integrate with not only downstream internal systems but also external parties as well.

So for example, Shashi and I are within the same company, but our systems communicate. We may be sitting on different teams. But our systems are technically on the same level of communication aspect. So I think it's quite important to have that.

And I get it. A lot of firms want to fragment their operations for cost analysis, cutting down on human capital, things of that nature. That's fine. I'm all for that. You can take that approach. But it's key to look at the workflows, and it's key to look at the systems and making sure that though you may have separate teams: Are you minimizing back-and-forth communication? Are you minimizing back-and-forth data input? Are you getting things off of Excel spreadsheets? Because you'd be surprised how many times I've seen V1, V2, V3, V3.2, V3.4, V3.5, and mind you, all this happens within 45 minutes for a specific fund flow.

So being able to have systems that communicate with each other, or maybe going with a provider where both functions are held within the same company would help you be set up for success.

Marshall: I think that makes a lot of sense. Now, on the next slide, we're talking about being a named agent and trustees. Joe, let's define this for the audience first before we jump into the bullet points, just in case there are people in the audience that don't understand what these roles are. Can you define these roles for us so they can understand?

Joseph: Correct. So from the named agent perspective, you are mandated in order to be the referee. I always like to say as the named agent, you have to not only look at the borrower's interest, but you also look at the lender's interest and you play a fair game. When it comes to the trustee, it's when it comes to your bank accounts, cash movements, things of that nature for liquidity purposes.

So if you were to tie both of those together and go with a vendor who could not only be mandated as a named agent, but also have trustee functions, you will have a faster solvency when it comes to getting things done. So I think that sums the roles and responsibilities for both of those as you asked.

Marshall: Okay. And in terms of some of the other bullet points on them, like without versus with them in place, can you kind of give us a little bit of color on that?

Joseph: Yeah. So when it comes to named agent and whenever it comes to roles within the deal, there are lots of functions. So not only is it named agent. You can also be named trustee. You can have your collateral agent. You can have a depository agent. You can be a calculation agent. I mean, you take agent and put a word in front of it, they've sliced it out for responsibility at some point in this market.

Now if you have multiple functions held by the same firm, you can really cut down on a lot of stuff. There will be less breakdowns in the funding process, less breakdowns in the communication process. If you are depository agent and named agent, the depository agent probably gets the information a little bit faster from the legal department because from a depository, they're the first CP that has to be met before the admin agent gets the cleared sign-off signatures.

So when it comes to having your capital recycled more quickly, if you go with someone who can wear these multiple hats, kind of circling back to my skill set question, you want someone that can wear multiple hats. Don't have it so siloed. Your money will move faster. You'll be able to close more efficiently, and you'll be able to cut down on a lot of manual errors.

Marshall: And Joe, when we're talking about efficiency and time, are we talking about hours? Are we talking about days? What is that time frame that you think putting this all together adds from an efficiency standpoint?

Joseph: All the above. Sometimes if you are doing a closing on a Friday, you can cut that down by hours and sometimes even days because you know it's a one-stop shop. You know that you can knock out all your CP requirements within one call, without having to do one call with this person here. I would like to say it's all the above.

Now here's the thing. Sometimes you do want to segment out certain things, like depository agent, you want to have a third-party person who is objective towards it. Or maybe you have a specific relationship. That's no problem. There are certain functions that would have a greater impact, in my opinion.

Marshall: Sure.

Joseph: So it's just being able to identify which service provider has the best approach to dot your i's and cross your t's for efficiencies.

Marshall: And just to be clear, for both you and Shashi, these are functions that can be on a standalone basis. Admin doesn't have to be grouped with this function. You could have loan operations and agent and trustee services as a standalone, not associated with fund admin if you need to. Correct?

Joseph: Correct.

Shashi: Definitely there are inherent benefits of having both together that's what we have discussed, but they both can be independently done, independently managed. Just to add to what Joseph said in the earlier conversation, there are also benefits of integration, including the fund. At times, most of the current activities happens to generate during the month end or quarter. And that's when you want to close your book as well. If at all that is the case of both being done at the same service provider, there is a higher level of integration of data, easier flow of data through APIs and file-based integration, which provides us or lets us to go away from processing an even through a period rather than just importing the data from the WSO to Geneva which will speed up the overall month and close process and also faster integration of all the statements, all the LPs, and the fund, which makes the overall process both at the loan level and on the fund level much more efficient.

Marshall: No, that makes a ton of sense. I completely agree. I can see that as well. Okay, so let's move on to the next component. In terms of operational setup, Shashi, this is kind of where you shine and what you do. So in terms of operational setup as a strategic advantage, why don't you walk through some of these components, and we can talk about what we can do and what we see in the marketplace.

Shashi: Overall, in terms of the operational setup, I think strategic advantage of having a service provider helps to have more efficiency in the overall process and also adds to the liquidity at the end, which is the cost of the operation which actively adds to the returns on the investment management because everything . . .

Marshall: Good point.

Shashi: Yeah, everything can be defined in terms of IRR lower cost but always higher IRR on an investment. There is also lower friction overall in terms of the functions with an integrated approach. And also, it provides a better advantage to the fund managers and a better peace of mind and a good night's sleep if it's all managed efficiently by a service provider.

Marshall: Okay. Joe, do you have anything you would like to add? I know that you sometimes have a different opinion from Shashi. So we might as well bring that to bear too, right, so it's not one-sided.

Joseph: Mine is all about implementation. From an operational setup as a strategic advantage, going with the appropriate partners will cut down on implementation. So whenever I'm going into a client and let's say we're the named agent and we're doing the loan operations, if I'm going to be leveraging the loan administration component from Shashi's team, that cuts down on our implementation. I think that's a huge advantage for cutting down the costs, having efficiencies, going to market quicker, reconciliation. And you want to find those partners because implementations are hard.

I'm pretty sure that we could reach out to the audience and say, "Give us some of your peaks of implementations and your pits of implementations," and everyone has a story. So I think the strategic advantage of having a proper implementation, when it comes to figuring out who those vendors are and that outsourced provider, will help give you peace of mind and it won't keep you up late at night.

Marshall: No. That makes perfect sense. So I guess that brings us to how CSC would support somebody, right? I think we've got a unique approach. And I think, Shashi, we wanted to talk a little bit about what we bring to the table from an infrastructure and a technology standpoint, which allows us to be this premier vendor in this space. Correct?

Shashi: Yes. So the overall technology that we have that we use is a combination of the gold-standard industry technology plus a proprietary technology, which provides a complete ecosystem for managing a complex product like a private trade or a syndicated trade. The reason why we have also done and we have created a dashboard which relays the information that we maintain product lines for them. The primary purpose of us doing that was provide the client with complete transparency and with the ability through the portfolio returns that we maintain for the client.

On top of that, what it also does is it provides an ability or the flexibility for them to define their own view. Everyone wants to see their return in their own way. So the dashboards that we have created provides that ability for them to have their own widgets and their own set of data that they want to see at the start of the day. Moreover, every person in the client organization can have their own view set up so that no two persons have to look at the same set of data, and they can look at the data which makes more sense to them.

Just to add a few example set of returns clients can look at, at their fingertips, all the settlement that is coming up for their day in case you're looking at settlement as a function. In case you want to ensure that the holdings are accurate, then you can look at all the holding data with just a click of a button. And also, if you want to manage your day-to-day activity, there's always a view for your date activity and contract maturity. So all in one single dashboard.

Marshall: Okay. I think that makes sense. So what we're saying or what you're essentially trying to say also is that the dashboard and the technology we're bringing to bear is allowing people to have complete management, oversight over the life cycle, from inception to liquidation, if I had to kind of paraphrase. Is that right?

Shashi: Yes. Exactly.

Marshall: Okay. So let's talk about the backbone then. Joe, I think you wanted to talk about this a little bit. This is the backbone that we're currently putting in place to make this a reality, correct?

Joseph: Yeah, that is correct. So know that Shashi and I sit on different teams. I think this slide really shows how we work well parallel together. So when I was talking about the implementation cutting down on time, reconciliations, and things of that nature, you'll see here so I represent the bottom component, when it comes to the borrower going into Wall Street Office, GP contacts, credit contacts, and debt domain.

So what we do is we start the relationship at the closing process with the borrower. So that's where we do the fund flow. We do our whole 170-point check when it comes to entering things into Wall Street Office. And not only do we track department information for loan processing, but we also track things such as your financial undertakings or your financial covenants. So not only do we integrate that into the tickler system within Wall Street Office, but then we also leverage Debt Domain.

Debt Domain is one of the industry-leading technologies when it comes to tracking this, sending borrower reminders, having syndication sites, having agency sites. And those two platforms that we utilize not only for compliance, but then also loan monitoring, it really sets us up to have good relationships with the GP ops contacts and the credit contacts. So we're constantly being transparent.

Now what happens is if you needed to move forward to the fund/loan administration component, this is where Wall Street Office would be communicating to Advent Geneva. Whether it be through API solutions, whether it be through reporting, we have the backbone of the operations when it comes to the loan. We have all the interest payments. We have the principal payments. We're tracking it on a global level.

But now when you're looking at it for fund and loan processing, that's where it goes into the Advent Geneva component, and then that's where Shashi and his team is able to support it from that perspective. And when it comes to the structure that we have, he was mentioning how he has the dashboard. We also have that transparency as well.

So we would utilize a way of reports, a way of portals, things of that nature to give visibility not only to the GP ops contacts but also the perspective of the borrower. Let's say the ops contact has multiple exposures across multiple borrowers. We have the capability to aggregate, concatenate, and show it based on what their perspective needs to be.

So I think what's great about the model that we have is that we take an approach of transparency, and we take an approach of the data is always updated real time. So we take our SLAs quite seriously. When it comes to our outsource model, when it comes to our named agent model, our SLAs are the backbone of what we deliver on. And we partner with technologies to ensure that our SLAs are best in class.

Marshall: And you and I were talking the other day, and there was an interesting point that you brought up is working with a servicer like ourselves or an outsourcer, from a technology standpoint, you had some strong convictions about why you would want to do that in terms of insulating yourself from technological change or system enhancements or running that in-house. Correct?

Joseph: Correct. Yeah, so I really like the fact that with the technology partners that we've gone with, we're also still agnostic at the end of the day. We're constantly looking out for the best delivery for how we provide these services, these dashboards, and that makes our services and our delivery quite agile.

Let's be honest, not all loans are the same. Sometimes structures are quite complex, things are delivered in certain ways. We've just partnered with a technology and a structure that allows our services to be as unique and adaptive for our clients and what we need to be providing, because whether you look at a loan in Latin America, whether you look at loan in EMEA, let's say you go into APAC, Hong Kong, Canada, our technology suite is adaptable and our workflows as well in order to not only service certain sectors but also global deliveries.

Marshall: I think those are all great points.

Shashi: And to . . .

Marshall: So let's move on to our . . . Go ahead, Shashi.

Shashi: Sorry. And to add to that, there is always something changing in the market. There is always technology advancement happening in the market. There is a significant investment that is required just to stay relevant and to make sure that even the technology that we're using is relevant. That also makes a big point in terms of having a technology and service provider to have you provide this service so that you don't have to keep on pouring money into technology for just keeping it up with the industry.

Marshall: No, I think that's all great points.