Private Credit Drives Transformation in Accounting Systems

Private credit is booming, and investment firms are taking notice. To stay competitive, they’re diversifying strategies, exploring new asset classes, and embracing new investment types like never before. Where in the past a credit manager may have had a middle-market direct lending fund, “now they have several different strategies at the same time. They also have an evergreen senior loan fund. They have, in the U.S., a BDC, or an equivalent registered product in Europe. They have co-invests. They have SMAs. And an institutional investor base.” - Cesar Estrada, Global Head of Private Markets at Arcesium.

Investment varieties are increasing, entity and investment structures are becoming more complex. As a result, loan terms with investors are becoming more bespoke. Investment firms focusing on private credit loans are increasingly adopting accounting technologies that provide the flexibility required to streamline operations, enhance reporting, and improve compliance within today’s landscape. These technologies are essential to managing the complexities of private credit investments, especially as the industry is seeing no signs of slowing down.

Growth brings complexity

In the early days of managing your firm, data is likely easier to maintain, and your accounting workflows probably operate more smoothly. But things change. Your firm grows, maybe exponentially. You might begin investing in larger volumes of structured products, launch a new fund strategy, or bring on investors with specific requirements or in new domiciles. The complexities of managing accounting efforts for private credit loans will introduce newer and bigger challenges:

• •Limitations of legacy technology creating an overreliance on manual processes
• •Disparate systems and conflicting sets of data reduce visibility over accounting data. The added complexity of loans simultaneously requires more comprehensive due diligence, and leaves firms with increasingly shorter timeframes to perform that due diligence
• •With workflows slowing down from manual work, increased steps, and more workarounds than ever, operations teams face an inability to scale processes efficiently

How you respond to these challenges will shape your firm’s future. If you decide to power through without considering modernization of your operations technologies and workflows, your firm’s growth trajectory might be impacted and possibly take a downward turn.

Sophisticated cloud-based platforms respond to evolving industry demands

A contemporary cloud-based platform allows for modernization of investment and accounting books of record, empowering private credit firms to get the most from their portfolio accounting. Among the many advantages are the ability to consolidate data, reduce technical architecture, and minimize the complexity that develops when managing disparate systems. The bespoke nature of private credit investments often mandates advanced functionality to accommodate adjustments to loan structures and repayment schedules. Integration with an existing ecosystem is usually necessary. Other capabilities include advanced reporting and data visualization capabilities, streamlined back-office systems, and automating accounting processes, which helps reduce errors and costs.

Align your firm behind data that provides a single source of truth

Investment firms in private credit now require specialized systems and operational infrastructure that can handle complex loan activity. Sophisticated investors and financial institutions around the globe are more and more drawn to the appeal of private credit. But as an industry, private credit is still new and growing, and its operational infrastructure is still maturing. This is particularly the case when it comes to supporting private credit managers’ capabilities in the areas of loan activity record-keeping. Investment firms now must eliminate inconsistencies between their investment and accounting books of record. To do that you need to align your firm behind data that supports a single source of truth.

Looking at the big picture, stitching data together from disparate systems across asset classes can be time-consuming, prone to error, and requires significantly increased manual oversight. For accounting efforts focused on the rapidly growing private credit loans industry, it is even more crucial that a technology platform can handle increased loan activity, a greater number of renegotiations, and the processing of rollover transactions. A system must also be able to smoothly process loan prepayments and calculate interest received. The bottom line is that lenders will be managing more customized transactions, there will be numerous types of borrowers involved, and a greater overall need to handle significantly higher volume processing.

Modernization is key to growth and sustainability

Technology is key to supporting accounting efforts around private credit loans. Processing loans manually is no longer feasible in the long term, especially for larger firms with multiple private credit portfolios and investments. To succeed, firms will benefit from an investment and portfolio accounting platform with a universal view of their books of record. A successful platform must have the ability to support complex multi-asset, multi-currency portfolios throughout the entire investment lifecycle and help your firm get the most out of its investment data.

The right platform must be able to support a significant number of key accounting technology activities, including:

• •Loan accounting and amortization
• •Management of different loan types
• •Accounts receivable tracking and managing functions
• •Integration of accounting systems with loan origination systems and risk management tools or reconciliation systems
• •Ability to track collateral and value of collateral associated with each loan, in addition to tracking changes in collateral value over time
• •Support the calculation and recording of the allowance for loan losses
• •Comprehensive general ledger functions and the ability to generate financial statements such as balance sheet, income statement, and cash flow statement specific to the private credit loan portfolio

In addition, the accounting platform must also be able to accommodate internal controls and provide detailed audit trails to protect and ensure the integrity of financial data. It must also allow for customization and configuration options that allow your firm to adapt to changing business needs, shifting the focus from data accuracy to generating alpha.

Data drives regulatory compliance and investor confidence

The private credit loan sector is experiencing burgeoning growth, with estimates suggesting it could reach between $2.3 trillion and $3.5 trillion by 2028. As of mid-2023, the market was valued at approximately $1.7 trillion, showing a robust increase from around $875 billion in 2020.^{1, 2} This expansion underscores the necessity for robust data management and compliance frameworks. Investment firms must navigate complex regulatory landscapes while ensuring transparency and accuracy in reporting. Technologies that provide detailed financial insights and facilitate due diligence are vital for maintaining investor confidence and achieving operational efficiency.

Cloud technology supports a burgeoning industry

Investment firms in the private credit sector have awakened to the possibilities in leveraging advanced accounting technologies to enhance their operational capabilities, improve compliance, and meet the growing demands of investors. These tools not only streamline processes but also provide critical insights necessary for navigating the evolving landscape of private credit investments.

Arcesium can help

Arcesium’s investment and portfolio accounting platform, UBOR^®, excels in portfolio accounting and investment data management, ensuring seamless integration and accuracy. To learn more, read our ebook: Streamline Investment & Portfolio Accounting for Private Credit Opportunities.

Sources:

^{1 https://www.jdsupra.com/legalnews/recent-trends-in-private-credit-2089236/}

^{2 https://www.morganstanley.com/ideas/private-credit-outlook-considerations}