Private credit: Opportunities and operational challenges

PARTNER CONTENT

With private credit funds presenting far more complex operational challenges than either private equity or hedge funds, partnering with a fund administrator with the proven expertise and technology tailored to meet the demands of the asset class can be crucial to success, says Aparna Parameswaran, Managing Director, SS&C GlobeOp.

Q: What opportunities are emerging in the private credit industry and how are you positioning your firm to take advantage of them?

A: A lot of innovation is happening in the private credit space as the market seeks out loans. Aside from traditional lending, funds are experimenting with lending against collateral, with many different collateralised loans emerging. Firms use innovative approaches, including esoteric assets like art, infrastructure, and life insurance. 

Many funds investing in the space are hybrid, so they may not be labelled as purely private credit. The space is attractive to private equity and hedge fund managers because it’s much less volatile than other investment areas. When you have a portfolio of loans, you can measure your bad debt ratio across the broad spectrum of firms you’re lending to, understand your risk ratios, and carve out a niche for yourself. Companies are also pursuing variable interest rate deals to lower their risk. 

To take advantage of the opportunities within private credit, you need to have access to data and be able to analyse it. Private credit loans are complex and bespoke, with negotiated terms such as cash flow, timing, and fee structures. A fund structure may have ten investments, but there are 100 mid-tier entities in that structure below the fund level—some of the clients making thousands of loans, which adds to the complexity. A typical private equity accounting platform isn’t geared to handle such processing. 

Keeping track of all that information and the associated covenants can be difficult without an experienced fund administrator with great technology. SS&C specialises in servicing these types of hybrid fund structures. We own private equity accounting software and a robust asset accounting platform. Our solutions ensure these platforms can talk to one another and collect, analyse and distribute data so each of our clients can get the most out of the information. 

Our technology is built to handle any structure and offers complete visibility from the fund level to investor allocations – liquid or illiquid. We are continuously investing in our loan data technology, as lending is still a very paper-based industry. We leverage intelligent automation to read agent notices and perform straight-through processing into our clients’ back-office systems. We want to be a hub for all loan data, whether from agent banks, the loan holders themselves, or other data providers with access to loan data.

Q: What three pieces of advice do you have for emerging private credit managers seeking to differentiate themselves in a crowded market?

A: Running a credit fund can be more complex than running a private equity vehicle or hedge fund, so emerging managers shouldn’t underestimate the operational complexity of private credit and hybrid platforms. Given the bespoke nature of many private loan deals and covenants, it’s tough to set up and scale successful programmes without advanced technology and data infrastructure capable of supporting the complex needs of both the front and the back office. 

A very robust middle- and back-office is also essential. Over the last decade, the influx of institutional capital into the alternative investment arena has pressured fund managers to provide greater transparency into holdings and meet rigorous operational due diligence standards. With more stringent regulatory reporting and disclosure requirements imposed on private funds since the 2008 financial crisis, fund managers must be able to demonstrate they have controls in place. 

Increased reporting demands present particular challenges, entailing complex accounting methods and the need for extensive reporting. Striking a reliable and accurate monthly NAV can be challenging for illiquid or hard-to-value assets. Investor accounting and profit and loss allocations are also more complex than for a hedge or private equity fund.

Finally, understanding and securing the right mix of talent and technology to meet obligations is vital. Attracting and retaining staff who understand the nuances of this asset class is a challenge. Managers must ensure they have accounted for the potential additional technology investment required. Outsourcing all or part of an operation to an experienced fund administrator allows managers to focus on the business.

Q: How are private credit managers managing liquidity risk, and what steps are they taking to ensure they can meet redemption requests?​

A: Managing cash flows for an open-ended, evergreen, or hybrid fund investing in private credit requires a good handle on cash projections. Managers need tools and technology to help forecast investment cash flows from interest and/or principal paydowns to be leveraged for redemptions. These calculations need to be coupled with projected subscriptions and any loan funding. Various off-the-shelf cash management tools are available in the market, but these do not work in isolation. Team members who can review and analyse the data inputs and outputs is key to success. 

Click here to learn more about SS&C Technologies’  Private Credit Solutions

Aparna Parameswaran, Managing Director, SS&C Technologies, Inc – Aparna oversees SS&C Technologies’ Private Markets and Hybrid/Credit funds business. She has worked in the Private Markets Alternatives business for over 25 years and has broad experience in accounting and administration across the spectrum of fund types and asset classes including real assets and infrastructure.