Operational Challenges for Private Credit Funds

If you follow the private investment markets closely, you have no doubt witnessed the rapid growth of private credit over the past decade. At an average annual rate of 13.5%, private credit (or private debt—the terms are interchangeable) has outpaced the growth of private equity, venture capital and real estate funds globally. And while it is still smaller than those other categories, alternatives analyst Preqin predicts that private credit AUM will exceed that of real estate funds by the end of 2023.

In our "Navigating Private Credit: Look Before You Launch" whitepaper we outline some of the reasons for this growth, most notably that private credit answers the needs of both borrowers and investors—borrowers needing a more flexible source of funding, and investors needing stable, risk-adjusted returns. As a result, private credit has attracted a substantial infusion of capital from a large number of institutional investors looking to offset market volatility. Most of those investors plan to maintain or even increase their private credit allocations in the years to come.

Where institutional money flows, fund managers are sure to follow. Just as investors have sought to diversify their alternative allocations, many fund firms focused on private equity or hedge funds are seeking to branch into private credit to meet that demand. They face strong competition from established players. They will also encounter significant operational differences between private debt and other alternative asset classes. Chief among them:

• More moving parts: Unlike a typical private equity portfolio, which may contain around a dozen companies, a private debt fund may hold hundreds of loans. An infrastructure designed to support private equity may not be able to adapt readily to the added complexity that private debt entails.
• Lack of standardization: Information on borrowers, most of whom are privately held mid-sized companies, comes in a variety of forms—often paper or PDF-based, which require a high degree of manual processing.
• Varied fund structures: Credit funds are typically closed-end, but some may be hybrids and or may include multiple special purpose vehicles (SPVs).
• Specialized capabilities: Firms need to be able to ramp up their capabilities in loan servicing and administration, portfolio and investor accounting.
• Jurisdictional compliance: While US-based funds tend to focus on the US market, European funds are likely investing across borders, and need to comply with the requirements of the different jurisdictions where they have loan exposure.

It’s critical to have a strong operational foundation in place before you start trying to raise funds or source deals, with both the expertise and the systems to satisfy investor due diligence from day one. Retooling an existing infrastructure to support a new asset class can be a lengthy and expensive process. However, you can get up and running more quickly and easily by partnering with a services and solutions provider that has global experience in the private credit market, and that has already invested in the infrastructure to support a variety of fund types and structures. SS&C’s Private Markets group has both the expertise and technology to support the operational intricacies of credit investment strategies.

In short, private credit is a growing market that presents a wealth of opportunities but also poses some unique challenges that you need to be aware of. Download our "Navigating Private Credit: Look Before You Launch" whitepaper for a deeper dive.