The idea of a one-stop capital provider may soon become a reality thanks to a growing number of alternative investment managers. Private credit markets offer strong cash yields and high returns, as well as the chance to diversify an investment portfolio. But the increase in private market deals means that capital markets firms need better processes to manage their deal life cycles.
There are four general strategies: private equity, venture capital, private credit, and real assets (with debt and equity as two separate investment categories). Private debt has proven to be an especially good financing option when compared to its public alternative. Public debt typically has higher fees, a longer diligence process, and more rating and regulatory requirements attached to it. The private credit market has more than doubled in size over the last decade and is expected to reach more than US$12 trillion worldwide in 2025.
Key Components of a Private Credit Strategy
Private debt is much more flexible than public debt—the amount, duration, terms, and conditions can all vary dramatically. This flexibility is appealing to both investors and borrowers, but it can come with added operational burdens, including administering the loan and managing the data associated with that loan.
In addition, private debt has numerous regularly occurring cash transactions, necessitating continuous maintenance, calculations, and reporting. Processing this ever-increasing amount of data cannot be managed at scale by manual processes alone. Firms need a centralized source of data and interoperable systems right from the start. Outsourcing can help firms consolidate their third-party relationships and ensure the presence of trained resources to facilitate business continuity.
Preparing to Enter the Private Credit Market
Firms working to build out their private credit market should keep the following in mind:
- Streamline operations to facilitate growth.
Private credit transactions require an especially high amount of monitoring, both of the events of the deal’s life cycle and unstructured data from loan documentation. Streamlining the many processes involved, sometimes even into a single platform, can ensure that a firm’s operating model will scale with future growth. - Adopt an effective integrated solution.
Any integrated solution being used to manage private credit market transactions should utilize a single sign-on process and offer near-real-time processing, either through API or messaging, rather than batch processing. A cloud-hosted solution can ensure that all users receive the necessary software enhancements in a timely fashion. - Keep watch on market events.
Market events can teach the entire industry lessons that can then be incorporated into their own practices. Data analytics tools should be equipped to handle such changes—for example, they could monitor loan details at a bilateral level rather than monitoring individuals at all lenders. - Be prepared for more complex deals.
Staying competitive in this growing field will mean firms need to handle more complex credit agreements and deals overall. Added complexity will require more agile, rapidly functioning technology. Relying on overly complicated manual processes leaves too much room for error.
To learn more about how the private credit market is changing, please contact me at [email protected] and download the Aite-Novarica Group and IHS Markit case study Private Credit: Achieving Operational Scalability for a Growing Asset Class.
