The private credit sphere has expanded significantly in recent years. The author of this article considers what structural and operational issues arise to ensure that this industry continues to grow smoothly.
The following article examines the private credit sector, one that has grown significantly, filling a gap vacated by the banking sector following the clampdowns on lending caused by the 2008 financial crisis. A decade of ultra-low central bank interest rates – now starting to unwind – was also a factor. This article is by Jason Meklinsky, chief revenue and strategy officer, Socium Fund Services. The usual editorial disclaimers apply; email tom.burroughes@wealthbriefing.com if you wish to respond.
Demand for private credit continues to grow as investors seek alternative sources of yield and higher returns than that which can be offered by public credit. At the start of 2023, the private credit market was about $1.4 trillion compared with $875 billion in 2020.
Based on the private credit market’s growth, we expect the following to be top of mind for the alternative investment industry in 2024 when it comes to navigating the many moving parts of private credit.
Outsourcing fund administration will continue to be a game changer for private credit fund managers
Asset and wealth management can be operationally complex. Staying on top of cash flows, interest rates, and borrower-lender communications is time-consuming and can become costly. Outsourcing the operations of private credit fund structures to an experienced fund administrator can ease the administrative and financial burden of managing loans and it is becoming more popular among private credit fund managers. A recent report by PWC on asset and wealth management operations says that one way to cut time and cost for middle and back-office operations is to outsource to a third-party provider.
An outsourced seasoned fund accountant will deftly navigate the challenges of investor opt-outs, partner allocations, distribution details, carried interest waterfall calculations, and many other twists and turns that can arise with private credit fund operations. The right fund administration partner can help private credit fund managers scale their fund operations, provide data protection and cybersecurity, and give them access to invaluable expertise.
In 2024, fund managers will need to ensure that they have an experienced fund administrator who can navigate the complexities of private credit fund structures.
The private credit talent pool will be more competitive based on the growing market
Over the past decade, the private credit market has grown tenfold, according to S&P Global. Looking ahead, private debt could balloon to $2.8 trillion by 2028, according to Preqin. As a result, more highly skilled personnel are needed to keep up with the exponential growth of the private credit market.
However, hiring the right person with the right expertise at the right cost is a big challenge. As mentioned in outlook number 1, outsourcing to a fund administration specialist can save on cost and provide private investment firms with the expertise required to be successful in meeting the demand and navigating changes in the private credit landscape.
Loan servicing models will be tailored to be more efficient for private credit funds
Consolidation of the middle-market banking landscape and global economic dynamics are leading to the rise in private credit and associated demand for external loan agency and administration services. The increased appetite for private credit funds means that loan servicing models need to be more efficient, responsive, and can accommodate complex investor requests. The best way we can meet this demand as an industry is through technology.
A recent study from Ken Research says the loan servicing industry is leveraging innovative technologies to provide streamlined processes, quicker loan approvals, and enhanced customer experiences. In 2024, streamlining processes such as know your customer (KYC) procedures for faster onboarding will be crucial. Enhancing the loan servicing infrastructure with technology to increase efficiency will continue to be top of mind for GPs and fund administrators this year.
Loan agents will need to be hawk-eyed when it comes to geopolitical events
In 2023, geopolitical tensions led to strong economic headwinds that caused increased credit rates and risk, and stricter credit terms for investors. Those in the industry agree, nearly 50 per cent of LPs and GPs saw geopolitical tensions as an investment risk. There is no question that more geopolitical events will take place in 2024, making it pivotal that loan agents keep a keen eye on the geopolitical environment. This will allow loan agents to properly advise investors on the best investment strategies to raise their capital during times of uncertainty. Geopolitical risk can also often be associated with regulatory policy changes. Loan agents will need to ensure that they are compliant as policies evolve throughout the year.
There will be increased focus on transparency in the private credit space
Transparency is a word we often hear in the alternative investment industry due to its opacity. In a recent research article from S&P Global it explains that tension between investors seeking more transparency and fund intermediaries looking to avoid disclosure is more meaningful for credit investors and is raising concerns over the degree of systemic risk that private credit represents.
For example, General Partners (“GPs”) looking for more insight into net asset value (“NAV”), or limited partners (“LPs”) seeking more visibility into their portfolio holdings, are demanding real-time access to information and greater transparency. In private credit, GPs and LPs must be provided with transparency so that both can make informed decisions on investments.
For this reason, the alternative investments industry has invested heavily in tech-enabled solutions. These solutions can streamline fund operations and deliver fund managers and investors with actionable insights and visibility into the entire investment process. However, human judgment will continue to be highly relied upon given the intricacies of private credit. Meeting transparency requirements will continue to be a focal point for partners and fund administrators alike in 2024.
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