By Paul Livanos, VP of Sales, Siepe
Surpassing market returns is the ultimate goal of fund managers. But in the relentless drive for alpha comes the risk of an unintended consequence: the Frankenstein model – a phenomenon all too familiar in the leveraged loan market.
Much like Victor Frankenstein, credit and CLO managers are fueled by ambition, constantly exploring new ways to tap into this market’s exponential growth by expanding their AUM and raising capital for new strategies. However, as portfolios and strategies evolve, many managers are slow to update their technology and operational processes. And when they do, they often end up piecing together a system of disparate software and solutions that are ill-suited for complex assets with different characteristics, compliance processes and funding types.
This is where the problems start to fester. Many components of these cobbled-together systems don’t properly communicate with each other, and are costly to integrate – with some legacy vendors even resisting integration. So despite any potential gains and progress seen by credit and CLO managers in the short term, there comes a moment in their journey when they realize they’ve created a Frankenstein-like monster—an unwieldy, incoherent abomination that stifles future growth and scalability.
By then it’s too late. Just as Frankenstein’s creation turned on its maker, this “Frankenstein” model also turns on the organization, introducing a whole plethora of challenges and inefficiencies that increase costs, disrupt data flow, and slow down decision-making processes. Fortunately, there’s a way to avoid all the chaos.
Escaping the Frankenstein Model
In today’s market, more providers than ever offer modern, vertically integrated solutions for credit managers. The tricky part comes in choosing the right providers.
Credit managers need to focus on building lasting relationships with vendors who act as true, trusted partners. Providers that offer fully integrated solutions that can interoperate with your current tech stack and are committed to evolving alongside your business. This will help streamline operations, while keeping you ahead of the curve with innovations that ensure smoother data flow as your business grows.
It’s not just about technology – a cultural shift in mindset is also needed. As managers strive to generate alpha and grow, many have continued to do things the same way for years. A prime example is in this “Frankenstein” model of bolting on solutions to fix one problem, only to create other problems down the line. Instead, they must be willing to constantly re-evaluate their approach and adopt new tools to create operational efficiencies.
While this shift may seem daunting, failure to do so will only result in having to deal with a larger, scarier project down the line – one that can be easily avoided, but severely impacts operational performance.
What’s great about these new tools is that they can significantly increase the efficiency of tasks that were previously heavily manual and time-consuming, such as cash reconciliation and security master updates. They also can help to bring disparate data sources together and streamline data flow – improving portfolio monitoring and analysis – giving you the insights needed to manage risk and leverage effectively.
The Takeaway
Don’t wait until you’ve awakened the monster. By embracing modernization, changing your mindset, and working with trusted technology partners, you can steer clear of the Frankenstein model. Not only will this empower your team to overcome the complexities and inefficiencies of the market, but also focus on more important decisions and optimize portfolio management to find the best cost of capital.
Contact us to see how we can help you.
