At a time when equity markets are volatile, and interest rates are climbing, investors are turning to syndicated bank loans for predictable and potentially higher yields. Yet, for all its sophistication, the loan marketplace is still largely mired in paper-based, manual processes.
Operational barriers: Manual processes drag down efficiency and add complexity
Many hedge fund managers and other institutional investors are interested in diversifying to this sector, propelling the growth of bank and private debt funds to an all-time high in 2022. However, while the returns may appear attractive in today’s market, investing in loans poses unique accounting and operational challenges. In fact, loans are arguably the most complex asset class to account for, which can be a deterrent to entry for many investors.
To put it more simply, the rapid growth and increased complexity of the loan market is outpacing the technology required to support it. The result is a market that is far less efficient than it should be, with average settlement delays of 20 days to as much as three months in some cases. Fund firms, meanwhile, incur manual labor costs and operational overhead resulting from inefficiencies, data discrepancies, and increased errors.
In a recent SS&C Advent guide: Investing in Loans: Time to End the Paper Chase, we argue that operational barriers shouldn’t stand in the way of generating returns from this growing market. Furthermore, to take advantage of investment opportunities, firms need a technology platform that streamlines automation and offers two essential features: a fund accounting system with the flexibility to support a wide range of loan types and unique structures, and an efficient means of entering non-standardized loan data into the system for faster, straight through processing and improved accounting accuracy.
Digitizing data for accounting consumption
Firms should be able to manage the entire loan lifecycle on a single platform - from transaction processing and settlement to accruals and income payments, as well as cash flow projections, valuations, amortization, and reporting. An automated, comprehensive accounting solution that supports a full range of alternative asset classes coupled with digital loan data is the key to mitigating the operational barriers to growth. This ultimately enables more managers to participate and reap the benefits of this growing market. To learn more, read our guide, or request a demo today.