Four key trends emerging in private credit

Assets in private credit funds are growing strongly – but managers in this sector need specialist knowledge and expertise to succeed

Assets in private credit funds now total USD1.6tn, having grown by 53% over the past five years, according to our latest report on private credit.

Intertrust Group’s review of research by data analytics company Convergence Inc identified 3,967 private credit funds at the end of March 2022 – up 56% since 2017.

Globally, investors’ demand for exposure to private credit is growing. The report found that more new funds are being launched in private credit than in any other credit fund strategy.

However, private credit is a specialist asset that carries more risk than traditional lending. This vibrant emerging sector also brings a greater regulatory and administrative burden than more traditional forms of credit.

We have identified four key trends emerging in the sector, as well as the challenges and opportunities they present for managers.

 1. The rise of private credit bespoke portfolios

Private credit is dynamic and complex, requiring specialist administration.

The need to attract investors has increasingly led to diverse portfolios, making each fund structure and composition unique and complex.

As private credit has grown, a range of niche asset classes has emerged, including supply-chain finance, litigation finance, sports finance and aviation finance.

This trend towards diversification has brought higher returns but also new complexities such as technology integration pressures and back-office challenges.

This, in turn, has highlighted the need for specialist expertise – because managers have to model how different scenarios might affect fund performance to demonstrate a variety of outcomes.

2. Private credit investors ask increasingly complex questions

Investors increasingly want due diligence and detailed data when they commit to investing in a fund.

That’s because many come from a background in traditional equity markets and are accustomed to more transparency and access to instant valuations rather than quarterly reports.

They will also seek information on how the portfolio may perform in different scenarios.

It can be challenging for fund managers to answer these complex questions in the time required.

Investors may also ask about exposure to specific regions or sectors, such as Russia, and whether the portfolio has any direct or indirect investment there.

Managers need access to quality data to provide answers.

3. Greater demands from LPs in private credit

Limited partners (LPs) now require more detail, more often and more quickly. They want more transparency and may request independent third-party valuations, even if a fund is closed-end.

There are also more regulatory reporting requirements and obligations. And increasingly complex loan arrangements can add to the cost of running a fund or portfolio.

Finding ways to automate and outsource are currently top priority for operating teams at many alternative credit investment firms. And as our report highlights, managers often need support in areas such as reporting, customisation, IT and due diligence.

4. Dwindling private credit talent pool

The Great Resignation has created a labour shortage, making scaling up and hiring the right people a major challenge for private credit funds.

Demand for private credit is growing strongly, as it fills the gaps left by banks who can no longer lend to a swathe of businesses because of increasingly conservative risk models.

However, the supply of skilled labour necessary to sustain this growth is struggling to keep up. The difference in demand and supply is challenging on a recruitment and a cost basis.

That’s why using a third-party service provider to help with administrative tasks has become a popular option for many managers.

It enables private credit funds to scale up without the time-lag of finding new hires.

Using a specialist outsourced administrator also provides the right expertise in jurisdictions across different countries and continents, with specialist local knowledge of varying legal and regulatory requirements.

What are the benefits of outsourcing private credit functions?

The three key benefits of a third-party service provider are:

• expertise
• scalability
• cost-effectiveness

Specialists who understand how to keep an entity compliant in the different jurisdictions in which it operates can save time and money.

Managers can scale up easily, without having to build their own software systems or buy in software models that soon become obsolete.

Private credit administration has peaks and troughs, and an outsourced team can save on costs during periods when the administrative burden is lower.

How Intertrust Group can help with private credit administration

The influx of new investors accustomed to high degrees of transparency will increase demands to produce more data more frequently.

Third-party providers servicing the private credit space need specialist knowledge, scalable human resources and technology platforms that can handle the sector’s unique complexity.

Intertrust Group has built the technological and operational backbone to serve any strategy at any level of growth.

Why Intertrust Group?

• Intertrust Group is a global leader in delivering fund and corporate services, capital market solutions, private wealth and employee benefit solutions to multinationals, fund managers, financial institutions and business entrepreneurs worldwide.
• We have 2,500 specialists working from 41 offices in 30 countries, including the world’s most important financial centres. As a result, you get a world of local expertise working with you to meet your goals.
• Intertrust Group is a publicly listed company with more than 70 years’ experience providing world-class trust and corporate services to clients around the world.