📝 The AGM Op-Ed: Sweet Relief for a Top Asset-Based Finance Pain Point - Loan Tape Automation
Views from the field with Arcesium's Senior Vice President, Solutions Architect Mohit Jethwani
Private markets are at an inflection point. Growing appetite for private investments is compelling firms to pursue innovative strategies, launch competitive products, enter new markets, and differentiate their business model. Yet as firms expand, many are colliding with an explosion of data, fragmented systems, error-prone processes, and cost growth.
Arcesium is a global financial technology company delivering pre- and post-investment operations and enterprise data management solutions designed to systematize the most complex workflows.
Arcesium was built from a platform developed and tested by investment and technology development firm, the D. E. Shaw group, and launched as a joint venture with Blackstone Alternative Asset Management. J.P. Morgan, another large client, later made a strategic investment in the company, helping Arcesium further its mission: to power the entire investment lifecycle.
This week’s AGM Op-Ed is brought to you by Arcesium.
If you want to learn how Arcesium is helping asset managers transform their post-investment processes from reactive to proactive, please enjoy perspectives below from Arcesium Senior Vice President, Solutions Architect Mohit Jethwani.
Sweet Relief for a Top Asset-Based Finance Pain Point: Loan Tape Automation
By Mohit Jethwani, Senior Vice President, Solutions Architect Arcesium
Loan tape management is the clipped wing of the asset-based finance (ABF) golden goose.
The ubiquity of private credit across today’s portfolios has mainstreamed the alternatives, demonstrating to investors its solidity. In fact, Bloomberg reported that large, publicly traded companies have become more comfortable taking on private debt.
At the same time, some industry analysts and market data have signaled caution for private credit markets in terms of rising defaults and deferred interest payments. ABF has become a more prudent approach with its reliance on secured collateral and tighter structural protections. However, as a colleague wrote in an April Alt Goes Mainstream article, operational hurdles make ABF no walk in the park, with daily NAV calculations, lifecycle event processing, and much higher volumes of transactions.
That burdensome loan tape management issue persists for firms expanding onboarding new loan pools. I have heard from more than one manager that loan tape cracking is the biggest pain point in the ABF strategy, which the WSJ referred to as a “private credit bright spot.” Here are some ways to reduce the complexity of loan tape cracking when ingesting and structuring large packages of loans, through loan tape automation.
The operational hurdle of loan tape management
When securitized loan pools are sold to capital providers like hedge funds, pension funds, asset managers, or insurance companies seeking liquidity and diversification, they must pull in data for various asset types such as consumer loans, auto loans, credit card receivables, and residential loans. In a time-consuming and error-prone process, these ABF clients buy large quantities of loans (e.g., 150,000-200,000 at a time) and need to manage the details of individual loans, which may have payments as small as $200 or $400. The loan tape provides the raw consumer and residential loan data for this process.
These spreadsheet files coming in from loan originators can contain enormous amounts of granular data, with anywhere from 40 to 70 different columns and up to 10,000 to 20,000 unique transactions, depending on how often files are received. Someone at the firm must create the security masters, modeling every single loan at the fundamental borrower level. We’re talking about typical relevant artifacts on the type of loan, the industry, trades, transactions, credit source, credit score at origination, or the current credit score, payment history — all the applicable asset servicing events.
Once processed, it gets more complicated when you consider the firm must replicate those with an external admin to make sure that the NAV produced at the end of the day is correct, so they can publish their daily NAVs (versus quarterly NAVs in direct lending). The need for bid tape analysis automation has never been more urgent.
Crack the loan tape cracking code
Solving this problem requires the efficient sourcing of data from multiple alternative lending platforms, accurately extracted from the CSV or Excel loan tape, which each have their own formats in terms of providing information. At the tail end of July, KKR completed a $6.5 billion raise for ABF deals, and scooped up Harley Davidson’s $5 billion consumer loan portfolio (in partnership with PIMCO). Large players like this, bullish on private credit, will go out and buy millions of loans.
They will have a loan tape to process from which to create the relevant security masters. However, only ABF technology with loan tape automation software can process the individual loan line items, capturing all the loan characteristics accurately — even if items are missing on an individual loan record.
Intraday insights for transparent performance tracking and risk reduction
An efficient process will prepare the data for diligence, settlement, and ongoing tape ingestion. But firms need a day-to-day view of the outstanding principal balance, the daily accruals, the loan characteristics, etc. This way, they can get an overall view of how the entire loan pool profile is changing day by day.
ABF pools of loans lack standardized elements and have dynamic terms and cash flows, making analyzing bid tape rates and pricing over time an imposing, ongoing task. Investment ops professionals and credit analysts who track data on a bitemporal basis have a recordkeeping superpower and a decided advantage over competitors who cannot. With bitemporal data modeling, analysts can peer into the exact state of a loan pool at any point in time, even if data corrections were made later.
Future-proof ABF operations with loan tape automation tools
Ideally, your ABF technology allows the processing of these files on a day-to-day basis, with invaluable transparency into how the loan profile changes. Additionally, the firm can smoke out discrepancies and data quality issues with automated daily processing. Upstream functions like investor reporting, loan pool analytics, real-time performance tracking, and precise fund valuation create even more value.
Firms must crack the loan tape problem before they can begin making impactful trading decisions based on the data for all the existing loans. You can imagine the challenge in generating insights from a pool of millions of loan positions involving millions of daily trades. Without such pinpoint loan lifecycle oversight, it can take as much as one full week to figure out a position size for a lending platform and produce loan-level IRRs. With ABF investment technology, firms can swiftly glean the IRR based on the amount of an individual loan and grab ad hoc information on positions, the assets, the liabilities, and cash balances on a daily basis.
Thrive in complexity of ABF with loan lifecycle automation
ABF’s growth is set to continue. A recent study revealed that global GPs and LPs favor senior debt and ABF as the most attractive private credit strategies, with 42% of LPs expecting significant growth in private credit exposure. Managers love ABF’s diversification, liquidity, returns, and its capital deployment with real asset collateral. Modern private credit lifecycle technology reduces the complexity of loan tape cracking, delivering precision, automation, and transparency across acquisition, validation, and management of loan pools to accelerate processing and reduce operational risk. Subsequently, firms benefit from faster bids, reduced friction, and stronger performance oversight across the full loan lifecycle.
Learn more about how Arcesium can support your ABF data management and operations strategy.
Mohit currently leads the Forward Deployed Solution Architecture team at Arcesium, where he is responsible for client solutioning and implementation. Before taking on this role, Mohit was part of the Financial Operations group, where he led the Middle Office team and successfully managed multiple large client engagements. Prior to joining Arcesium, Mr. Jethwani spent nine years at the D. E. Shaw group as Vice President, overseeing trade operations and middle office functions. Mohit is a CFA charterholder.
Alt Goes Mainstream’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research and consult advisors on these subjects. Alt Goes Mainstream’s work may feature entities in which Broadhaven Ventures or the author has invested in.