As we wrap up our discussion of the key takeaways from our “Financing the Economy 2023” survey, conducted in partnership with the Alternative Credit Council, we’ll look at risk and liquidity management in private credit. Our research originated from a survey of 56 private credit managers and investors, followed by one-on-one interviews with respondents. We’ve already discussed how private credit managers have shown resilience in a high-interest rate environment, as well as current capital deployment opportunities and the role of leverage in private credit.
While closed-ended commingled funds remain the primary choice for private credit investors, there are signs that this is changing, with investors starting to use a broader range of structures. Investors have been increasingly seeking structures that maximize their investment returns and provide exposure to private credit strategies. This trend has led to greater volumes of capital invested through open-ended funds, managed account structures and co-investment vehicles.
As preferences continue to shift, our research shows that private credit fund managers expect the demand for alternative structures to increase. However, the data shows that most private credit assets are still managed in closed-ended fixed maturity structures. However, while it’s a relatively small proportion of investors currently accessing private credit through open-ended structures, investors are increasingly exploring more liquid alternatives.
Corporate lending strategies continue to make up the bulk of private credit investing. The corporate loans underlying these strategies typically have multi-year maturity profiles, so private credit fund managers using open-ended funds to invest in these assets need to employ multiple liquidity risk management tools (LMTs) to meet the needs of their investors. Employing multiple LMTs within a single fund structure allows more flexibility to tailor the tools to investors’ needs, like adjusting the length of the lock-up period or size of the gate. The managers interviewed as part of our research highlighted their need for flexibility to structure the most appropriate LMT for each fund, which is vital to ensuring the alignment of the maturity of the assets with the needs and expectations of the investors.
Policymakers have introduced rules relating to liquidity risk management, and market practices are already addressing many of policymakers’ primary concerns. LMTs are typically designed and agreed to before the investor commits their capital. This supports the investor’s understanding of how their redemption will be processed across a range of scenarios. Investors are becoming more familiar with the benefits of more liquid structures to increase investment efficiency, and even small efficiency gains can significantly improve returns.
To learn more about how LMTs can be used to support investors’ risk management needs, download the full "Financing the Economy 2023" report.
