Navigating the operational complexities of private credit
Updated: Nov 7
A1’s Carrie Whamond attended HFM’s Private Markets European Summit at Pennyhill Park, hosting a discussion on navigating the operational complexities of private credit.
Following the theme from the discussion, we explore the current private credit market and how it has reached where it is today; the risks that arise when fund managers seek to yield greater opportunities in private credit and how this can introduce too much complexity into middle- and back-office operations; and finally the trend driver behind outsourcing and how it is shaping the future of the sector in terms of IT solutions and strategies.
Since the financial crisis of 2008, the private credit market has been thriving. With banks operating under tighter lending criteria, a gap in the market emerged within corporate financing. Where traditional banks were uneasy to loan money, savvy and sophisticated private investors did.
According to the Intertrust Group, assets within the private credit funds total at 1.6tn USD in 2022 and over the last five years, this figure represents a rise of 53%. With such a hefty turnover, the private credit market has been able to diversify its offering and come a long way since 2008, spreading into a broad range of activities such as supply-chain finance, direct loans and litigation finance.
Whilst diversification has enabled certain market players to enjoy larger returns, it has also resulted in a greater burden for compliance teams in terms of day-to-day operations. Diversification can be problematic for back-office operations if their systems are outdated. It is essential for a portfolio to work in sync and leverage the same data sets in order to provide consistent results. With such diverse portfolios now in play, if private credit firms do not have a clear data management strategy with standard processes in place, COOs can find themselves in a challenging position whereby their own internal policies and procedures become inconsistent, hampering working with other investors, SPs or financial organisations.
Both insufficient internal resources and outdated systems for day-to-day operations can be costly and cause inefficiencies within private credit firms. Not being able to effectively track individual loan performances and their level of risk can lead to misguided judgements due to lack of clarity and transparency of data. By outsourcing back-office operations, private credit organizations can continue to focus on their core skill; embracing opportunities that arise with greater diversification.
At the same time, the private funds industry is predicted to be impacted by the Great Resignation trend. According to a ‘Global Workplace Hopes and Fears’ survey carried out by PwC in 2022, 20% of employees are likely to change their jobs within the next year. Whilst this trend began in retail and hospitality roles, PwC has suggested this trend is set to impact the roles within fund management. Investing in skilled back-office workers for tax, accountancy and operations is costly and with a potential skills gap becoming greater, outsourcing these operations can help private credit firms to side-step potential resource issues.
Alternit One are an outsourced IT Provider, who specialise in the design, build and running of public cloud and communications infrastructure to the alternative investment sector. We support clients who chose to outsource their back-office solutions by delivering infrastructure support so that in-house teams can enjoy a high-quality end user experience when it comes to their day-to-day operations.