Private Credit and the Upward Role of Technology

March 7, 2024
Read Time: 6 minutes
Private Markets

[An update to content originally published on September 30, 2022]

How technology is playing an increasingly prominent role in private credit

The private markets have seen incredible growth for more than a decade, with private credit playing a key component of diversified investment portfolios. From 2020 to 2022, the annual growth rate of private credit jumped to 23% from just 12% from 2010 to 2019.1 With no signs of slowing, forecasts project the private credit market will increase to $2.3 trillion by 2027.2

Why is private credit booming?

The fast growth of the asset class is attributed to a decrease in lending from banks and attractive returns, making it an appealing tool for portfolio diversification. While direct lending remains the most popular sub-strategy, Pitchbook data shows that mezzanine funds have at times surpassed distressed debt as the second-most invested private credit structure, providing borrowers with an alternative to traditional senior debt and equity financing.

How the private credit AUM acceleration is driving a data explosion

With the acceleration in the asset class, fund managers are now flush with data, creating both a challenge and an opportunity.

As firms respond to an influx of LP data demands, many need help to digest and synthesize the information they need to report back to stakeholders. LPs have the leverage to demand more, faster, and accessible data. And many are doing just that. Good, clean, digitized data is the foundation to support increasing reporting and analysis demands.

Technology is helping firms work through the pain points of their data lifecycle to meet the needs of their stakeholders and use this information symmetry for collaboration and decision-making.

Five key takeaways to better manage the growth of data

  • 1.Treat your data as an asset
  • 2.One of a private credit firm’s top priorities is to unlock more value from its own data, infrastructure, and ecosystem of vendors. The ability to instantly connect with data sources, integrate multiple systems, ingest, and transform datasets enables you to work from a unified, single source of truth. By harmonizing, validating, and unifying information from front to back, firms can put data at the core of their business and confidently make investment decisions.
  • 3.Ingest. Standardize. Repeat.
  • 4.Delivering bespoke vs. plug-and-play capabilities is always a balancing act. Anything that touches the end user will have a fairly high degree of customization. However, the ability to automate processes can help minimize human error and put the end user in a stronger position. Core competencies such as data management and analytics to ingest, validate, harmonize, and visualize the data can help create information symmetry, systemize complex activities, and open new growth opportunities.
  • 5.Learn from past experiences to create greater transparency
  • 6.Investors are hungry for data. As GPs grow, their success adds to business complexity and compounds their data challenge. As firms respond to LP demands and set new growth goals, they need to draw from what they’re already doing. Start with something tangible and bite-size, learn along the way, and build on the data journey over time.Think about meaningful use cases one by one rather than attempt to address the needs of all constituents immediately. As cloud-native platforms become even more mainstream, you’ll want to carefully evaluate if your legacy tech stacks can support a digitally integrated ecosystem.
  • 7.Prepare for the convergence of new technology
  • 8.Technology’s role in private credit will only expand and become more complicated over the next decade. Between the war for talent and digital transformation, adopting cloud-based technology will no longer be optional. The increasing use of machine learning and Gen AI, along with blockchain, smart contracts, and digital assets, is already taking hold. While advanced technologies may still seem nebulous, what is clear is that they will disrupt traditional ways of doing business. Easy-to-use solutions such as low- and no-code functionality or self-service tools can be a critical way to expand the technology user base and enable non-technical users to digitize processes and automate workflows – on their own.
  • 9.Know that technology will not replace trusted partnerships
  • 10.As technology advances, it will produce outcomes that we could have only dreamed of — ChatGPT quickly comes to mind. That said, tech tools are only as effective as the people who use them. What’s more, the importance of relationships won’t change with any technological advancement. Managers who balance investments in their team with adopting advanced technologies will be in a stronger position to create transformative outcomes for their clients.Similarly, advanced tools only work when the information they rely on is accurate and useable. Getting there starts with a technology foundation that’s accessible and trustworthy.

Using technology to address your fund managers’ most pressing challenges

With assets doubling in the private credit space over the last few years, more loans, deals, and investors mean more underlying data points related to borrowers, deal terms, market trends, and more.

Unlike in public investments, data in private credit is less standardized and may be highly bespoke for each investment, raising important questions such as:

  • How do you systematically source varied data from disparate sources?
  • Where do you store the data?
  • How do you aggregate incongruent data together?
  • How do you make sure you have all the data required to meet investor and regulatory reporting demands?

Are your tools fit for purpose?

Firms need proper systems and processes to support the asset class operationally or they risk falling behind competitors, lose the advantage of quick time to market, and hold themselves hostage to the limitations of their current technology.

Firms expanding from pure public strategies into private investments are realizing their existing data management processes no longer support their growth plans.

The key elements of strong data management must work together to form a strategy that will provide peace of mind when it comes to everyday tasks that use data. A data platform with modern technology allows firms to grow without having to rethink their data management strategy every time they invest in a new asset class.

Seamless and automated processes that collect and integrate data — and cleanse and normalize it — save time and minimize human error. As you work to instill the technology that helps build trust in the accuracy and quality of your data, your teams will be able to collaboratively and confidently use insights to make more informed decisions.

Ready to master the pillars of data management?

While the outlook for private credit remains strong, only time will tell the impact of macroeconomic factors. One thing for sure is that technology will play an increasing role in helping firms better understand their business and deliver greater transparency to their investors.

As you seek to clarify the complexity of the private markets, we delve into data management challenges — from collection and digitization to analysis and reporting — and explores the benefits of a modern data platform.

Learn why a holistic data management strategy is essential in the private credit market.

Sources:

1 J.P. Morgan DataQuery as of 2023

2 Preqin

Cesar Estrada
Cesar EstradaPrivate Markets Segment Head

Cesar is responsible for overseeing Arcesium’s application of its core competencies in data integration and harmonization to the investment lifecycle of managers in private capital markets, including private equity, private debt, real estate, and infrastructure.

Previously, he served as Senior Managing Director and Alternatives Segment Head for North America at State Street – a role in which he drove the growth agenda for a business with approximately $1 trillion in Assets Under Administration (AUA) by leading new product launches, expansion into new client segments, strategic partnerships, and acquisitions. Prior to that, as a Managing Director at J.P. Morgan, Cesar led the Private Equity & Real Estate Funds Services business from launch to $350Bn AUA. While at J.P. Morgan, he also held investment banking roles in New York, London, and Hong Kong.

Education & Credentials

  • MBA, Kellogg School of Management at Northwestern University
  • BS in Chemical Engineering, ITESM

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