Focus on alternative investments continue to see explosive growth, and have fundamentally altered the financial landscape. These investments, which include private debt, private equity, infrastructure, and hedge funds, have become increasingly popular among institutional investors. According to projections from a BCG report, by 2027, alternative investments are expected to account for 22% of all financial assets under management and generate a staggering 55% of the revenue for asset managers. As this shift continues, asset owners are allocating more of their portfolios to alternatives in search of higher returns and diversification.
While private equity has long dominated the alternative investment space, private debt is rapidly catching up. According to the Preqin 2024 Global Report: Private Debt, private debt AUM is expected to reach $2.8 trillion in investments by 2028, almost double the 2022 figure of $1.5tn. And its assets under management are growing at a faster rate than private equity. Although private equity assets are still significantly larger, the gap is expected to narrow over the coming years.
Several factors are driving the growth of private debt. The retreat of traditional banks from lending, largely due to stricter regulations, has created a vacuum that private lenders are filling. Additionally, investors are increasingly seeking portfolio diversification and are becoming more comfortable with private debt as an asset class. This shift is making private debt an attractive option for institutional investors looking to generate steady income streams.
With this rapid growth significant challenges come for investment managers. The complexities of alternative investments, coupled with rising operational costs, a fragmented operating model, and a surge in data volume, have created new obstacles for organizations. In this evolving landscape, the need for robust, scalable solutions is more urgent than ever.
In this article, we dive deeper into some of these challenges and offer an update on SimCorp's initiatives in this area. This piece continues the discussion from the blog we published last year on this topic.
Key Challenges in Managing Alternative Investments
The continued rise in allocations to alternative assets introduces several business challenges, particularly around operational efficiency and data management.
Rising Operational Costs. As portfolios become more complex, operational costs naturally increase. Many asset managers are struggling with fragmented operating models that, while functional in the past, are proving costly and inefficient to maintain as their alternative investment allocations grow.
Technology Integration. The rapid pace of technological development is another hurdle. With so many options available, it can be overwhelming for organizations to build out an optimal operating model that integrates all necessary technologies. The high costs associated with these integrations further exacerbate the challenge.
Data Quality and Volume. While more data is available than ever before, its quality has not necessarily improved. Managing the large volume of data in alternative investments, much of which relies on manual processing, often leads to inconsistent results and higher error rates. This has made it difficult for organizations to predict potential outcomes and effectively manage risk within their alternative portfolios.
Manual Processes. Many aspects of alternative investment management, especially related to data entry and processing, remain highly manual. This reliance on human intervention not only increases the likelihood of errors but also hampers operational efficiency, particularly as data volumes rise.
In the following sections we are going to take a closer look first at Private Debt, followed by direct investments, and then we round up with a general look at some general features across Alternative Investments.
Private Debt: SimCorp’s Current Coverage
SimCorp ONE supports end-to-end management of the private debt lifecycle, covering a wide array of instruments, such as direct loans, bilateral loans, unit tranches, corporate loans, credit facilities, term loans, senior secured loans, infrastructure debt, and syndicated loans.
Key capabilities include managing static data for loans and automating transactions based on commitments. It allows users to register and manage commitments, drawdowns, repayments, coupon payments, and interest. SimCorp ONE also enables the creation of contract tranches with customizable terms and conditions, offering the flexibility to split or merge them based on product requirements. Interest calculations can be performed using benchmarks, base rates, margins, risk rates, and payment-in-kind options.
SimCorp ONE also supports advanced accounting for private debt, handling processes like IFRS Fair Value through profit and loss (P&L), amortized cost to P&L, and tax lot accounting. The platform facilitates secondary trading activities, including block trades, amortization, and P&L calculations.
For the front office, SimCorp ONE includes "what-if" scenario modeling, allowing users to simulate and evaluate potential outcomes before committing to transactions. This feature helps assess various deal alternatives, including liquid investments, to support well-informed decision-making.
On the performance side, SimCorp ONE tracks essential metrics such as yield to maturity, annualized return on investment, weighted average life, modified duration, and internal rate of return (IRR), ensuring comprehensive visibility into private debt performance.
Recent updates from SimCorp include business process support to automatically register changes in commitments when a lender opts out of participation; this affects positions, as the change in ownership is reflected accordingly. Another recent update enables bulk deletion of transactions and contracts, accommodating the frequent changes in terms and conditions common in private debt.
Private Debt: SimCorp’s Future Plans
As part of these market demands, SimCorp is continuously enhancing its solutions. Key highlights of recent and upcoming product developments include:
Automation of Secondary Trades. Unlike primary investments, secondary trades involve more intricate dynamics because the lengthy settlement process often overlaps with common events like paydowns or repricing. During this period, the seller is still recognized as the investment holder by the agent, meaning they receive all cash interest and paydowns, while the front office must ensure the asset isn’t mistakenly sold again. To manage this, two views are required: an internal view reflecting the position as sold, and an external view showing it as held to properly calculate and receive interest and paydowns. This distinction is equally crucial for accurate performance calculations, as it ensures correct cash flow tracking.
SimCorp is working to fully automate the creation of transactions to minimize manual intervention and ensure seamless cash reconciliation. The system will also automatically integrate these processes with accounting to ensure proper profit and loss (P&L) tracking.
Covenants. SimCorp will be adding new modules to monitor covenants, recognizing their importance in managing private debt. The aim is to provide a user-friendly dashboard that displays covenant breaches while also delivering proactive alerts whenever new records or information suggest a potential breach. This will enable users to receive notifications in advance, ensuring that any issues are identified before proceeding with additional investments.
Total Cost of Portfolio. SimCorp is looking at enhancing the total cost of ownership and delivering a 360-degree view of all investments while modernizing the user interface. This will include integrating private debt into the alternative investment manager to address client requests, with the potential use of artificial intelligence.
Original Issue Discount. Furthermore, there will be improvements in accounting related to original issue discounts (OID).
CECL. SimCorp also plans to incorporate historic balances for the Current Expected Credit Losses (CECL) model for loan facilities under U.S. GAAP.
Direct Investments: SimCorp’s Alternative Strategy Analysis – ASTRA
SimCorp has for a number of years worked on improving cash and cash forecasting in SimCorp as we reported back in 2022. This concept is now referred to as the Alternative Strategy Analysis, or ASTRA.
Some of the features of this module is to help users determine how to achieve a target allocation to alternative funds through pacing plans. It also assesses diversification by evaluating the commitment efficiency ratio. Determining cash requirements for the upcoming quarter to meet expected capital calls are handled through Capital-Call-at-Risk and Cash-Flow-at-Risk analytics. And SimCorp's solution addresses hypothetical scenarios, such as the impact of another pandemic or other unexpected events, through stress scenarios.
SimCorp has enhanced its Astra module to include direct investments in alternatives forecasts. Previously, Astra supported solely fund structures, such as traditional GP-LP partnerships and closed-ended commitment-based funds. However, the module now accommodates direct investments, recognizing that many clients have these assets in their portfolios and wish to incorporate them into their forecasts.
These direct investments can include various projects, such as infrastructure investments, airports, toll roads, and energy projects. The module can now generate 10-year NAV forecasts for alternative portfolios. This includes the ability to distinguish contributions to NAV, cash inflows, and cash outflows from both funds and direct investments.
Document Processing: Alternative Investments
SimCorp currently offers an automated solution for processing documents through integration with the third-party system Alkymi. This solution enables the ingestion of unstructured documents, such as fund reports, and converts them into structured data for easy analysis. By leveraging artificial intelligence, the system identifies and extracts key data points, reducing manual effort and minimizing the risk of errors. This process, which has been discussed in previous blogs from 2023, continues to evolve.
To further streamline operations and create a seamless straight through document processing, SimCorp plans to do several different enhancements.
The workflow begins with document collection from sources such as capital notices and performance reports. Alkymi’s Data Inbox service can aggregate reports from GP portals and email inboxes into a single directory. SimCorp Dimension will then process these reports automatically, identifying document types and structuring the unstructured data. The extracted data will be saved in the Dimension database.
Once the data has been matched and saved, a semi-automated entity-matching step will follow, where the system will assess whether all relevant data points were extracted with sufficient confidence. If funds, components, and portfolios are matched successfully, the system may proceed directly to transaction creation and decomposition without further human intervention. This includes automating the processing of capital calls and distributions, allowing for a seamless workflow that minimizes the need for human involvement.
Valuation: From Quarterly to Daily
A classic valuation of an alternative fund portfolio shows changes over time, with fluctuations based on quarterly reports. These increments appear as discrete steps because the valuations rely on those quarterly reports. SimCorp already offers a solution to improve this process by maintaining quarterly look-through data for each fund in the portfolio. When capital calls and distributions are received, the NAV is adjusted accordingly, considering only the amounts allocated for investments and excluding management fees.
The capital for investments is then assigned to the underlying assets, which are revalued daily using current FX rates. If any publicly listed securities are part of the portfolio, their prices are also incorporated. As a result, the portfolio valuation becomes more dynamic, reflecting daily changes rather than quarterly updates. For instance, in a four-month period, the NAV might shift by as much as 7%, which could be identified much sooner than waiting for a quarterly report.
This solution has been available since 2023, but adoption has been slowed by the large amount of data required and several manual steps. Some of these steps have already been automated, and with future releases, SimCorp plans to further automate the maintenance of quarterly fund look-throughs, the processing of capital call notices, and the decomposition of cash flows toward investments. Eventually, SimCorp plans to almost fully automate this entire process.
General Enhancement: User Experience of Alternatives
SimCorp is working on introducing a next-generation user interface designed to enhance the user experience.
Beyond aesthetic improvements, SimCorp is changing the architecture of the front end to make it accessible via a web interface, eliminating the need for users to access the system through a Citrix environment. This transition allows for broader access to important reporting data and approval processes, even from mobile devices. The new architecture will facilitate continuous release and deployment and not be tied to the current quarterly release cycles we know from SimCorp Dimension.
SimCorp aims to present relevant information tailored to users' current tasks, ensuring that workflows are event driven, self-explanatory and require minimal training. The interface will have a consistent look and feel across various solutions, whether for alternative investments or traditional investment workflows.
In addition to the general portfolio overview, there will be dedicated views for alternative investments, encompassing funds, direct investments, and private debt. A key feature will be the quarterly valuation process for alternative funds, which will provide an overview of all funds undergoing evaluation. This will graphically indicate which funds have met reporting deadlines and which still have outstanding documents. The application will focus on exceptions, ensuring that all necessary data points are extracted and matched correctly before processing.
Furthermore, SimCorp plans to implement reconciliation checks within the quarterly evaluation process, assessing factors such as significant shifts in NAV and management fee comparisons against capital account statements and limited partnership agreements. This approach aims to ensure that any discrepancies are flagged for further review, ultimately enhancing efficiency and accuracy.
Looking Forward: The Future of Alternative Investment Management
As the demand for alternative investments continues to grow, so too will the need for advanced technological solutions that can handle the complexity of these assets. Automation, artificial intelligence, and seamless technology integration are critical to managing the challenges associated with alternative portfolios.
SimCorp’s ongoing product developments aim to address these challenges by providing a more streamlined, efficient, and automated approach. This is especially prevalent in the alternative investment space as the need for automation in for example document processing provides clear benefits. As the industry continues to evolve, asset managers will increasingly rely on these technologies to stay competitive and keep up with technological advances.
The future of alternative investments is bright, but only for those who are prepared to navigate its complexities with the right tools and strategies. By leveraging the latest advancements in automation and AI, firms can ensure they remain ahead of the curve.
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