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The growth of private credit is creating back-office pressures

25 May 2022

Michael Dittenhoefer

Business Development Manager, Funds

Michael Dittenhoefer

Business Development Manager, Funds

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The asset class is booming, but private credit’s operational complexity can squeeze resources to a breaking point. Managers must be prepared

Assets in private credit funds now total USD 1.6tr, a rise of 53% in the past five years – astonishing growth highlighted in our recent private credit white paper.

That’s why established private equity funds, as well as traditional hedge funds, are turning their attention to private credit, while new managers sense a golden opportunity.

Traditional long-short hedge funds are diving in, committing 20%-30% of their books to illiquid assets, with private credit playing an ever greater part.

The challenge they all face as their assets grow is operational complexity. Private credit deals are often arcane. The processes are manual and bespoke, to an extent rarely found in other asset classes.

New fund managers might be unprepared for this, while more established managers may struggle to scale with their current back-office infrastructure.

Private credit is awash with opportunity, but funds moving into the space or looking to grow should understand that it can squeeze limited resources to breaking point.

Can in-house teams handle private credit complexity?

Established managers from other sectors probably already have in-house fund administration teams and technology. But private credit is resource-intensive, with deals requiring huge amounts of manual processing. Documentation can run to hundreds of pages.

Scaling with a team used to more straightforward loan administration can soon reveal the limits of in-house capacity. As a measure of this complexity, it’s worth noting that large investment firms often have teams solely dedicated to private credit.

What do private credit investors demand?

Meanwhile, new managers, even those who have spun off from larger funds, must show they are set up for success.

Private credit investors are sophisticated – a mix of high-net-worth individuals and institutional investors – with high expectations of services and transparency. They want reassurance that funds can meet their demands.

New managers in the space can provide that by advertising that they have an operations team with the expertise and capacity to cope.

That’s important because, as private credit grows in popularity, the squeeze on back-office resources intensifies. Follow-on funds are launched with accelerating frequency. The time between fund launches has dropped from an average of three years to just 15-18 months.

At the same time, private credit is expanding from basic direct lending into a wide range of niche activities. Areas such as sports financing and aviation lending require even greater specialist expertise.

Creating operational efficiency in private credit

All this threatens to put a brake on private credit growth, by creating bottlenecks in the back and middle office. The complexity of private credit means there are no easy solutions.

Fund managers have traditionally favoured in-house teams; but throwing bodies at the problem is not always an option.

Even the brightest graduates will require time and training to grasp private credit’s esoteric nature. Proven specialists are in high demand, commanding salaries to match.

Technology can certainly improve operational efficiency – and that’s especially true if you have yet to venture beyond the spreadsheet stage of fund monitoring. Even proven platforms aren’t a magic bullet.

Good technology is a tool. It needs experts to run it. They must pull out critical data and present it in a way that creates transparency for investors and regulators. It must be tailored to the specific needs of private credit.

Investing in technology creates cost rather than efficiency if you don’t have the in-house talent to use it fully.

Nimbleness is key to private credit growth

Whether in-house or outsourced, private credit funds need the back and middle-office resources to match their ambitions.

For emerging managers, a specialist operations team can help overcome allocators’ natural preference for established players. Meanwhile, managers in larger firms with a strong track record in private credit are running up against the challenge of scaling quickly without piling on cost.

Nimbleness is key. Private credit is becoming more competitive as hedge funds move in. Successful funds deploy capital quickly and effectively.

That creates another challenge, because much of private credit’s administrative burden is concentrated during the investment phase, as managers ramp up the book. Having exhausted operations personnel working all night to get deals done just isn’t efficient. In the finely tuned world of private credit, it’s a recipe for error.

Paying attention to the details of private credit

So, managers can’t afford to underestimate the operational complexity of private credit. They need to employ specialists or outsource specialist services to experienced partners. Teams and technology must be shaped for private credit‘s particular challenges.

The good news is that managers are increasingly proactive in seeking solutions. They have seen the pitfalls and are exploring new ways to avoid them.

They see a sector ripe with opportunity, but only for those who are properly equipped. Private credit is not an easy win, but the rewards are there for those who pay attention to the details.

Why Intertrust Group?

  • As a strategic partner, our proprietary innovative technologies are combined with global knowledge and experience to deliver added-value services catering for all asset classes, while increasing manager visibility of portfolios on behalf of a fund’s investors.
  • Our expert teams harness tools and cutting-edge technologies to eliminate costly errors in fund administration and corporate actions, investor relations and portfolio management.
  • Intertrust Group is a publicly listed company with 70 years’ experience providing world-class trust and corporate services to clients around the world.