The private credit market growth trends

Private credit has seen remarkable growth in recent years, outperforming public markets and constituting a substantial portion of the asset management industry. Investors are gravitating to private credit because of its portfolio diversification. Fund managers appreciate the increased returns in this tranche of the private markets, and borrowing firms have been attracted to its speed and execution.

The approximately $1.5 trillion market consists of direct lending, distressed debt, mezzanine funds, real estate, and more.1 And according to the same PitchBook research, it’s an industry that has more than doubled since 2016.

Despite the surge in capital inflows, many private credit funds are still operating from legacy technology that’s unable to keep pace with market growth. Dated systems have a knock-on effect of:

  • Hampering fund manager’s ability to manage portfolios from a synchronized source of data
  • Slowing GP’s agility to swiftly meet transparency demands
  • Limiting funds’ power to compile and analyze data and performance

While incremental technological changes have improved the state of the loan market, operational dexterity is still lagging. As private markets investors continue to allocate more to private credit strategies, firms must thoughtfully consider if their existing technical ecosystems are fit for the future.

Let’s look at three critical components of a private credit fund’s portfolio to understand how firms can capitalize on the growth of the private credit market.

Manage portfolios from a single source of truth

Credit managers often find themselves in the precarious position of reconciling multiple sets of security master data with their counterparties. Data points, such as spread, maturity date, and amortization schedule, are vital in assessing credit risk and determining investment profitability. However, discrepancies can — and do — surface due to the decentralized nature of data management. When each party maintains their own version of the security master data, misalignment can lead to confusion, errors, and potential financial losses if not addressed promptly.

Without a unified system, fund managers must look through each data point — of each source — to identify any mismatch. If there is mismatch, fund managers must determine the accurate values and data points they should be using.

Solutions that offer automated capabilities enable fund managers to identify data inconsistencies, streamline processes, reduce errors, and improve accuracy.

CASE STUDY: Improving the Private Markets Investor Experience

Provide transparency with clean, accurate data

Research from the Private Funds CFO Insights Survey 2024 showed in the past 12-24 months, almost half of survey respondents said LPs are asking for more detail and analysis from GPs. Close to two-thirds of respondents reported increased levels of LP interest toward managers’ back-office operating models.2

GPs often struggle to meet LP demands while juggling mounting data-related challenges with growing their firms. Adding to the pressure, regulatory requirements also require GPs to scale up, all resulting in demands for modern technology to address the needs of multiple parties.

In Arcesium’s recent proprietary survey of investment data management professionals, which explored the priority initiatives, perceived barriers, and decision criteria of private markets firms, respondents surfaced several recurring themes. Notably, a consolidated and reliable view of data and the accuracy and integrity of data stood out. Responses from survey participants that their systems were vulnerable to reputational and regulatory risk were also an eye-opening concern. And perhaps something that was unsurprising from the survey: funds cited their desire to improve their ability to grow and win more business by keeping customers better informed, developing unique investment strategies, and identifying growth opportunities.

As demands for transparency from both investors and regulatory bodies grow, a consolidated and reliable view of data will be particularly pertinent for firms looking to instill accuracy and integrity.

Sophisticated systems also allow firms to think beyond a framework for transparent data management and governance. In addition to upstream and downstream integration, a modern data platform that seamlessly runs quality checks with lineage allows a firm to track and audit their data enabling them to feel confident the data they are providing is accurate.

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Piece together the performance and attribution puzzle

With private credit now on firm ground as an asset class of its own, how do fund managers and investors measure performance and analyze attribution?

Unlike the public markets, there is no like-for-like asset class or index to accurately benchmark against. As a result, fund managers often struggle to analyze fund performance and track attribution. Longer holding periods and infrequent issuance in credit assets can lead to outdated metrics, complicating accurate portfolio performance measurements, especially for managers handling multiple funds with diverse strategies and tools. Disparate systems, data sources, and calculations can create complications, particularly for managers with numerous investment strategies across multiple funds.

Modern technologies provide a holistic view of performance track records, metrics, and benchmarks for private credit investments. Their functionality allows managers to dig into intricate calculations for a holistic analysis and attribution of their private credit funds. With seamless access to their data, fund managers enhance visibility and derive valuable insights from portfolio, fund, and investment data. Fund-level and role-based information, along with complete data lineage, also let managers confidently share data with downstream users, such as their investment and operations teams.

To learn how private credit firms are transforming their processes to deliver clean, validated, and accurate data on a unified platform, read Mastering the Performance and Attribution Puzzle in Private Credit Funds.

Author: 
Jyoti Orphanides
Jyoti is Vice President, Head of Technical Content for Arcesium. She joined Arcesium in its early days and spent 7+ years focused on the firm’s client training and sales engineering initiatives. Jyoti’s recent move to a technical marketing role marries her unique perspective of Arcesium’s capabilities with a bent on ensuring thought leadership and product content is relevant to clients’ distinct challenges.

Sources:
1 Will more banks join the private credit fray in 2024?, PitchBook, January 16, 2024
Insights Survey 2024: How LP Scrutiny Is Increasing, Private Funds CFO, December 1, 2023

 

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