Harnessing Data Will Help to Drive the New Frontier in Private Credit Markets

The private credit market has experienced accelerated growth in recent years, emerging as a crucial alternative to traditional bank lending. The expansion is driven by various factors, including changing economic conditions, regulatory environments, and evolving investor preferences.

At the same time, private markets are diversifying with new and complex asset classes adding to the operational burden. This level of complexity demands sophisticated systems and processes that can handle diverse investment strategies and reporting requirements.

Private credit is an exciting market that demands operational excellence

There’s a huge opportunity in place right now and private credit is an exciting place to be. More and more lenders of size and scale are participating, but what shines through the most is these markets must continue to perform at their fullest potential. Firms must be prepared operationally, technologically, and institutionally to differentiate from their competitors and grow their markets.

The new frontier in private credit is an opportunity to optimize operations. Despite investors already managing roughly US$1.5 trillion globally in private credit, Preqin anticipates even greater growth to US$2.8 trillion by 2028¹. And this is despite private credit only recently attracting the attention of the broader investor market. With fund managers and investors increasingly turning toward the private markets for greater returns, today’s managers are vying to carve out their niche in an environment that demands operational excellence at an accelerated pace and at a scale never seen before.

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Technology is essential and will lead the charge in solving problems

To succeed and grow, firms will have to embrace a culture of being open to and leaning on a technology expert to help solve their data problems. Connecting the dots internally means focusing on solutions that are technology driven.

People, process, technology

Finding a north star when building a successful middle and back office that can drive private credit operations means aligning the three pillars that should be at the crux of your strategy as your firm works to create resilient and scalable operations.

• People: Assemble a skilled team with expertise in operations, compliance, and risk management
• Process: Streamline processes by automating repetitive tasks, implementing robust controls, and ensuring data integrity
• Technology: Integrate sophisticated technology to enhance efficiency, security, and transparency

Integrate robust technology to mitigate out-of-date solutions

Investing in private credit comes with distinct challenges: infrequent valuations, hard-to-assess credit quality, and opaque risk factors can make it a challenge to get operational processes right. The complexities of managing data in private credit markets require that firms instill operational excellence by adopting advanced technologies and collaborative strategies. By addressing these challenges through improved data governance, standardization, and integration, firms can enhance their operational efficiency and decision-making capabilities.

It's important that firms understand market challenges and take an outcome-centric approach to managing challenges. What capabilities do you want to deliver, what level of scalability do you want to achieve, what kind of experience do you want internal clients to have? Addressing these questions means a deep look at the challenges you are likely to face:

• Lack of standardization: Different investors maintain various forms of information, which can lead to inconsistencies in data attributes and formats. A lack of a unified data model can result in low data integrity and complicates reference data management. 
• Data integrity and transparency: The private credit market lacks a single source of truth, which challenges fund managers to verify holdings and make informed decisions. This is exacerbated by the disintermediation of banks, which has increased capital flows but also reduced transparency. 
• Data sourcing and normalization: Sourcing data from external parties is made more difficult by privacy concerns and a lack of data-sharing between institutions. Using multiple non-standard data sources complicates the organization and normalization of data. 
• Data quality issues: Any reliance on non-standardized data sources leads to frequent inaccuracies. Fund managers must implement rigorous data quality checks to mitigate these risks, which can be resource-intensive and prone to human error. 
• Volume and complexity of data: The volume of data involved in private credit lending is substantial, driven by the sector’s unique and complicated characteristics. There is a need for prompt processing for accurate reporting and decision-making, which can be overwhelming for deal teams and may add a layer of anxiety and risk. 
• Operational challenges: Many firms still operate with siloed systems across various functions such as accounting and reporting, which leads to inefficiencies. A unified approach to managing volumes of data is essential to streamline operations and reduce redundance in data collection.

Private markets managers and investors are at an inflection point

Be careful of falling back on out-of-date solutions. As firms raise assets, launch new products, and diversify strategies, they’re colliding with an explosion of data, error-prone processes, fragmented systems, and unstable costs. It’s crucial to not fall back on dated legacy solutions, even though they may bring a level of comfort because they are known and familiar.

While it’s tempting to think you can solve problems internally, it’s important to recognize when an outside partner can help.

• Take a holistic approach to system integration and a unified view of data, which can help create scalable methods and workflows.
• Always evaluate the cost-benefit analysis of developing in-house solutions versus partnering with technology partners that offer specialized, ready-to-deploy solutions.
• Focus on automating processes and enhancing existing systems to reduce reliance on manual intervention and specialized talent.
• Be proactive to address and prioritize strategic improvements. Don’t delay in investing in technology and practices that support long-term growth.

Be strategic in your approach to optimizing operations

While there is no “one size fits all” for private market lenders, optimizing operations in private markets involves a strategic approach to people, processes, and technology. Understanding the unique challenges and common pitfalls can help firms identify opportunities to improve operations and establish best practices that support growth and scalability.

The right partner can work with your team to deliver integrated technology solutions, and thus, can play a key role in helping your firm achieve operational excellence. Ultimately, the goal is to create a streamlined, efficient, and compliant operational framework that drives your success in private credit.