John Pellew, principal, distribution and securitisation, Arrow Global, discusses the rising importance of technology in managing credit portfolios and how to use it to create competitive advantage

It has become a bit of a cliché to say that technology, data, analytics – and importantly – the appropriate application of such tools has become fundamental to running a successful business. And yet, despite the regularity with which the topic is discussed, how precisely this applies to the distressed loans market has not been fully appreciated. 

For credit fund managers like Arrow Global, technology, data and analytics serve an immediate business purpose – and one, we believe, that is broadly replicable across the industry. It is vital in growing a portfolio of high-yield assets without significantly scaling headcount, and key in creating economies of scale that enable growth without hugely increasing costs.

The primary way we have achieved this ourselves is by deploying effective analytics techniques that accurately predict collections on non-performing loans and other distressed assets. In layman’s terms, we use machine learning and other tech tools to define contact and collections strategies across our markets, and from there, accurately calculate projected future calculations.

This data gives us two precise advantages. First, the access it provides to collections data improves the accuracy of our collections modelling and collections strategy – important for both us and our investors. Second, the insight it gives us into Arrow’s historic dataset is essential for how we build and test our underwriting and pricing models.

At Arrow, it is hard to overstate the importance of data to our business model. We have built our predictive models from 15 years of collections data across a dozen asset classes in five countries and €65bn in assets under management. This institutional knowledge, aligned with our deep in-country local expertise, allows us to look at any prospective portfolio and quickly assess the potential value of collections based on what should be paid for those assets.

Without owning the servicing value chain and, by extension, access to its data, we would not be able to support the business.

Even in this scenario, we know that technology is not a silver bullet. By itself, it adds no value to a business – and instead requires constant innovation and appropriate application to achieve business goals and investment outperformance.

This is where continuously evolving technology to accommodate the needs of our portfolio management team is essential. It also demonstrates the need for continued investment in developing and expanding the quality of data available to in-house data scientists and analysts, whose evolving insights can then feedback through any business.

Ultimately, the formula of bringing servicing data into our fund management business, appropriately applying analytical tools and never resting on our laurels, has enabled us to scale without adding additional costs and to grow our market share.

Looking ahead, we are working to ensure that technology will allow us to increase the velocity of fund assets. This is managed through a process of digitisation and real-time optimisation and automation of the securitisation process. This process touches every aspect - all the way from construction, issuance and on through to the monthly administration of the SPVs, reconciliations and cashflow distributions to bondholders.

As a case in point, through the mass acquisition of data from our vertically integrated serving and fund management business, we see a world where we will run live, real-time multi-variate optimisation of our asset pools and portfolios, using both structured and unstructured data in order to maximise value and balance the needs of all stakeholders and to give our commercial teams the data and curated insights they need to outpace, outprice and continue to outperform our peers.

The industry has a real opportunity to change the way granular NPL and distressed assets are represented, proven, packaged and then ultimately traded. As always, the end game is to leverage technology to drive value in ever more creative ways, while evolving the opportunity for our investors and partners.