The rising importance of technology in managing portfolios
John Pellew, Principal Distribution and Securitisation, discusses the rising importance of technology in managing portfolios and how Arrow is using this to create competitive advantage.
What is your professional background prior to joining Arrow?
Originally, I was an accountant turned banking and finance professional, having worked in Australia, UK and Singapore, primarily in trade finance, financial markets and equipment finance. In the six years immediately up to joining Arrow, I founded and ran a blockchain fintech company focusing on the development of software platforms for the management of loan origination, underwriting, servicing, asset distribution and securitisation, with the process and data provenance underpinned by blockchain technology.
Describe your role and responsibilities at Arrow, especially as they relate to the FIM business?
As Principal Distribution and Securitisation, my role is to define new strategies to increase the velocity of assets under management and to increase the scale of leverage finance available to the business. When distilled down all this is designed to increase the volume of cash produced by the fund and, in turn, the IRR generated for LP’s. Our objective is to leverage cutting-edge technologies, develop next generation digital assets and automated securitisation, with the potential to meet any investors specific investment mandate or ALM requirements at a lower cost per unit to run.
What role does technology play in managing an investment portfolio of NPL and non-core credit assets?
Technology is critical to the future of asset management at Arrow, the mission is to streamline and automate the management processes, so we can scale without scaling headcount and associated costs. This is critical for Arrow because, by design, we focus on niche asset pools and asset classes that offer greater than average returns on assets ‘than those more typically available in the broader distressed credit markets. Arrow brilliantly captures the opportunity to deliver greater than average returns from smaller more niche pools of assets, while also benefiting from the lowering of portfolio risk due to diversification, the challenge then becomes how to cleverly manage our portfolios with better economies of scale.
We needed to find another way to manage and scale such a diverse portfolio of assets without significantly adding headcount to the business: this is where the application of technology comes into play and where innovation drives value creation.
At Arrow we run an agenda of continuous development of our in-house Fund Management System. The tech must continuously evolve to accommodate the needs of the portfolio management team, as more and more diverse set of assets are brought into the portfolio. Our development methodology is built around the agile process and capability development. We had to design and build our own bespoke platform, as there was nothing off the shelf that provided the flexibility and agility we needed as a business.
How does Arrow deploy analytics and technology across its investments?
It’s one thing to buy and manage assets, it’s another thing to be able to run effective analytics and to accurately predict collections on NPL and other distressed assets; we believe Arrow is one of the best in the market at this. A significant part of our success is driven by the “local, local” strategy for servicing and collections. When you combine deep, local, expertise in servicing, lots of data and modern data analytical techniques, you gain market advantage.
These three elements are brought together through the data extracted from our servicing platforms and a sophisticated data strategy to generate a single view of data across the business. Arrow has invested significantly in developing and expanding the quality and quantity of data available to our data scientists and analysts.
We have been using machine learning and other sophisticated tech for a number of years to define contact and collections strategies across the group and then to accurately calculate projected future collections. However, without access to the servicing and collections platform data you have nothing. Data is the new battle ground.
What are the benefits of this approach and why is it important?
If data is the new battle ground then the amount, the quality and a singular view of data becomes extremely important in achieving outperformance vs peers.
How does this approach support Arrow’s pricing and underwriting capabilities?
Fundamentally, the models we’ve built from 15 years of collections data across a dozen asset classes in five countries and €65bn in assets under collection, allows Arrow to look at any prospective portfolio and quickly assess the potential value of collections and therefore IRR based on what should be paid for those assets. Few other companies in the business have access to this scale of data and proven track record because they don’t own the servicing value chain.
In what ways does its use of technology differentiate Arrow?
Today our automation technology allows Arrow to scale without adding significant additional costs, such as headcount. Overlaid with our” local local” business model, where we own the collections supply chain, it allows us unprecedented access to data for analytics and modelling of collections.
Tomorrow, technology will allow us to increase the velocity of assets, giving greater access to leverage finance, it will help automate the securitisation process all the way from construction through to the monthly administration of the SPV’s, reconciliations and cash flow distributions to note holders.
The Arrow platform includes the full breadth of capabilities across origination, underwriting and servicing – what are the data benefits of this joined-up approach?
Fundamentally, in addition to better access to off market portfolio sales and therefore better pricing, there are two main data advantages:
- Access to collections data for better more accurate collections modelling and collections strategy
- Access to historical dataset for building and testing underwriting models
How do you see the role of technology within the Arrow business evolving in the coming times?
Good tech is an essential part of the growth plan of Arrow. It’s what will drive reduced costs through automation, greater and greater capability for analytics, unlocking the potential for new products, services and even change how we view the components of value within portfolios. Technology will enable the innovation required to keep creating uncontested market space and keep Arrow at the forefront of industry.
How excited are you about the future of the business?
I’m super excited to be driving the technology and innovation agenda at Arrow, leading with work on how we create, package and sell our assets through high speed, highly automated blockchain based digital asset securitisation technology. I think we have a real opportunity to change the way assets are represented, proven, packaged and traded and in the process, Arrow has the chance to create large sectors of uncontested market space making Arrow a unique investment opportunity for LP’s.