Assets in private credit funds continue to grow, but managers in the sector need specialist knowledge and expertise to succeed.
Preqin estimates the size of private debt assets under management (AUM) at $1.3 trillion. While private debt was an established source of funding for the middle market, it gained further traction among investors and borrowers after the global financial crisis. Between 2010 and 2022, the AUM of private debt funds grew by about 4.3x.
However, private credit is a specialist asset that may carry more risk than traditional lending. This vibrant emerging sector also may bring a greater administrative and reporting burden due to the complex and often bespoke nature of these investments with various cashflows and covenants to track.
What’s next in this increasingly complex sector? We’ve identified four key emerging trends, as well as some of the challenges and opportunities they present for managers.
1. The rise of private credit bespoke portfolios
Private credit is dynamic and complex, requiring specialist administration. As private credit has grown, a range of niche asset classes has emerged, including supply-chain finance, litigation finance, sports finance, and aviation finance. The trend towards diversification brought higher return potential but also new complexities to fund operations. A combination of expertise and technology integration is required to administer a fund portfolio consisting of complex, often bespoke private credit investments.
The difficulty managing these portfolios compounds when one considers the increasing investor due diligence and transparency requirements.
2. As private credit grows, investor due diligence gets more complex
Investors perform increasingly thorough due diligence and want detailed data when they commit to investing in a fund. Many come from a background in traditional equity markets and are accustomed to more transparency and access to instant valuations rather than quarterly reports. They also seek information about how the portfolio may perform in different scenarios.
It’s challenging for fund managers to answer these complex questions in the time required. Investors may also ask about exposure to specific regions or sectors and whether the portfolio has any direct or indirect investment there. Managers need access to quality data to provide answers.
3. Greater need for transparency in private credit
Limited partners (LPs) now require more detail, more often, and more quickly. They want increased transparency and may request independent third-party valuations.
There are also more regulatory reporting requirements and obligations. Increasingly complex loan arrangements can compound the administrative burden to keep up with regulatory reporting requirements that vary across regions.
Finding ways to automate and outsource are currently top priorities for operating teams at many alternative credit investment firms. Managers often need support in areas such as reporting, customization, IT, and due diligence.
4. Dwindling private credit talent pool
The talent shortage in the credit fund operations space makes scaling up and hiring the right people a major challenge for private credit funds. Demand for private credit is growing strongly, as it fills the gaps left by banks that can no longer lend to a swath of businesses because of increasingly conservative risk models.
However, the supply of skilled labor necessary to sustain this growth is struggling to keep up. The difference in demand and supply is challenging on a recruitment and a cost basis.
That’s why using a third-party service provider to help with administrative tasks has become a popular option for many managers. It enables private credit funds to scale up without the time lag of finding new hires.
Using a specialist outsourced administrator also provides the right expertise in jurisdictions across different countries and continents, with specialist local knowledge of varying legal and regulatory requirements.
What are the benefits of outsourcing private credit functions?
Three key benefits of a third-party service provider are:
Expertise: Specialists who understand the complexities of a loan portfolio, fund accounting, and how to keep an entity compliant in the different jurisdictions can save time and money.
Scalability: Managers can scale up easily, without having to build their own software systems or purchase software models that soon become obsolete.
Cost-efficiency: Private credit administration has peaks and valleys. An outsourced team can save on costs during periods when the administrative burden is lower.
How we can help with private credit administration
The influx of new investors accustomed to high degrees of transparency will increase demands to produce more data more frequently. Third-party providers servicing the private credit space need specialist knowledge, scalable human resources and technology platforms that can handle the sector’s unique complexity. We’ve built the technological and operational backbone to serve any strategy at any level of growth. Our team of capital markets and fund experts can assist with end-to-end private credit operations including loan agency, loan administration, fund accounting, and compliance support.
CSC provides tailored administration and strategic outsourcing solutions to support the complex operations of alternative asset managers across jurisdictions and asset types while adhering to global regulations and compliance. A market leader, we work with funds of all sizes, from start-ups to the largest and most experienced fund managers in the world. Founded in 1899, CSC prides itself on being privately held and professionally managed for more than 120 years. We are the trusted partner of choice for more than 90% of the Fortune 500® and more than 70% of the PEI 300. CSC has office locations and capabilities in more than 140 jurisdictions across Europe, the Americas, Asia Pacific, and the Middle East. We are a global company capable of doing business wherever our clients are—and we accomplish that by employing experts in every business we serve. We are the business behind business®. Learn more at cscgfm.com.