In its first 2022 survey of Investor Intentions, the Alternative Investment Management Association’s Alternative Credit Council reported that 40% of US institutional allocators plan to increase their private credit allocations over the following year. This is no surprise, given the estimated AUM for private credit has grown at an average of 13.5% annually over the last 10 years [1].
The appeal of private credit stems from its resiliency in volatile times. In the early days of 2020, as global financial markets went into a brief tailspin, private credit took a hit as well, as borrowers sought to restructure its loans. The dip turned out to be short-lived, however; by year end, managers had generated some $196 billion in fresh capital, according to AIMA [2]. In 2021, most managers reported fewer than 5% restructurings in their portfolios. More recently, the market has benefitted from uncertainty in the public equity markets, as private credit tends to deliver more stable risk-adjusted returns over time.
Managing operational challenges
By most accounts, the outlook for private credit fund raising, capital deployment, and steady returns remains robust. That’s one reason this asset class is attracting players from other corners of the alternative arena in order to capture more of their clients’ alternative allocation.
For firms looking to enter the private credit market in a meaningful way, it’s essential to have an operational infrastructure that can account for increasingly complex fund structures, with a level of automation to support increasing transaction volume. Compared to other asset classes, processing of private debt is highly manual in nature. Most borrower information comes in the form of PDFs, with little standardized data. The inconsistencies of cash flows, erratic payments, and loan delinquencies require a fair amount of exception handling.
The outsourcing option
In short, taking advantage of opportunities in this dynamic environment calls for technology solutions that can:
- Support a full range of complex private debt fund structures, including distressed debt
- Provide transparency for investors and deliver industry-standard reporting
- Enable the translation of non-standardized loan information into digital data that can be consumed and processed within accounting systems
- Account for multiple customized fee agreements and accurately calculate investor fees
- Ensure business continuity in the event of a disaster
- Position funds for a smooth transition away from LIBOR
Migrating to a platform that meets all these criteria will pay dividends over the long term. The managed services option provides firms the agility to launch new strategies or enter new markets. Moreover, moving your core operational platform offsite has the added advantage of built-in business continuity.
Through times of up-and-down market volatility and interest rate uncertainty, private credit has proven to be one of the more resilient sectors of the investment landscape. Fund managers with the right operational underpinnings will be better positioned to take advantage of the opportunities uncertain times may present.
To learn more about Geneva® and how it supports fund managers operations as they diversify strategies, visit our website, or request a demo today.
[1] US Investor Intentions H12022, Alternative Investment Management Association Alternative Credit Council, February 2022
https://acc.aima.org/research/investor-intentions.html
[2] Financing the Economy 2021, Alternative Investment Management Association Alternative Credit Council, 2021
https://acc.aima.org/research/financing-the-economy-2021.html
