How fund managers can succeed within the ever more competitive private credit market

We know that the private credit market is receiving a lot of attention right now. According to Private Debt Investor: ‘private credit is gaining ground, with between $1.2-$1.4 trillion of US loans outstanding at the end of 2023’. Potential benefits of a growing market include higher yields and diversification. However, the industry also comes with its fair share of challenges. Understanding and navigating these challenges is crucial for fund managers looking to make the most of the many opportunities within this sector. 

Jonathan White, CEO at Portfolio BI, explores six key challenges fund managers face when scaling in the market and thoughts on how to overcome them:

1.    It’s All About Data

Data is the key to enhancing due diligence, risk mitigation, regulatory compliance, innovation, technology adoption, and transparency in the private credit space. It is the most important element of a successful strategy and firm. Data is the source of all activity in the fund ecosystem and affects every action a fund or manager takes in today’s technology-driven environment. In some front office environments, there is work to be done; some reporting and systems are still analogue, and these are passed back to the middle office teams before they become part of the data ecosystem of the fund. This is time consuming, inaccurate and results in presenting data that is not in real time. When it comes to data, firms in the private credit market will need to be laser focussed on data quality and integrity, data integration complexity, privacy, analytics and cybersecurity risks. To keep up with regulatory demands, firms may be confronted with the financial pressure of technology investment to ensure they can remain competitive in a volatile and fast-paced environment.


2.     Enhanced Due Diligence 

Given the limited transparency in the private credit market, fund managers have the opportunity to differentiate themselves by conducting thorough due diligence on potential investments. To achieve this, fund managers need to focus their efforts on leveraging data analytics and alternative data sources, so that they can attain deeper insights into industry trends and borrower performance.  Managers can leverage data analytics and data sources to monitor their portfolio performance in real time, via a central dashboard. In recent years, it has been noted that investors also see the benefit of fund third-party vendor relationships to ensure the deep industry knowledge required by the credit market is accessible to managers. This is noted as part of more modern due diligence requirements and returns.


3.     Risk Mitigation Strategies

To manage risk effectively, fund managers will employ robust risk mitigation strategies, including diversification across sectors, geographies, and credit profiles. This is of course part of the day-to-day fund ecosystems. Managers are often tasked with implementing rigorous underwriting standards, stress testing portfolios, and establishing contingency plans for adverse scenarios to help anticipate and mitigate credit, liquidity, and market risks. Managing these risks not only requires managers to have sophisticated risk assessment techniques and robust portfolio diversification strategies; they also need technology that can support the decision-making process. Investment in a firm’s technology and operational infrastructure is therefore fundamental to help managers stay ahead whilst also appropriately managing risk. If leveraged correctly, managers can use data to identify and mitigate risk. Credit risk, market risk, operational risk, and cyber risk.


4.     Navigating The Regulatory Environment

 The regulatory environment surrounding private credit is complex. It varies by jurisdiction and as a consequence, such differences can impact investment strategies, disclosure requirements and compliance costs. This is particularly critical for managers who operate and play on a global scale. To overcome this, firms are taking steps to review their reporting processes and infrastructure. We all need to be able to respond to an ever-evolving regulatory landscape.


5.     Innovation and Technology Adoption 

Embracing innovation and leveraging technology will enhance efficiency, scalability, and decision-making capabilities in private credit investing. In 2024, we know it is that fund managers can harness the power of advanced analytics, machine learning, and AI tools to streamline deal sourcing, underwriting, and portfolio management processes. Implementing the latest technology can automate processes, when done well, allowing fund managers to re-allocate their time to focus on other business tasks. Used effectively, data drives innovation and supports adopting new technologies that can improve their efficiency, scalability, and competitiveness.


6.     The Fund Ecosystem

Data is key to third-party vendors relationships, such as fund administrators, compliance partners and in fact investors. It provides transparency, real time visibility, enhanced speed of communication and reporting, while also offering protection to vendors and managers when reporting to the regulator. Firms are carrying out due diligence on vendors more regularly, to ensure that they are aligned with the funds overall ecosystem. This requires establishing a strong partnership with vendors, as relationships built on trust in this regard are essential for long-term success.

By embracing these areas to support growth in an environment of increased competition and adapting to the evolving landscape, managers can navigate the challenges with confidence. However, there is little room for error. Managers should ensure they are operating with robust, scalable technology that enhances their operational structures and enables the leading edge when pursuing new opportunities.


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