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Data Fluency

Private Credit Boom Creates Data Fluency Problem

Private credit is poised to become the second-largest private markets asset class, with the industry topping $2.1 trillion globally last year in assets and committed capital. Basel III Endgame capital requirements and a higher-for-longer rates environment are expected to fuel a continued uptick in private lending, leading many to believe that despite its rapid growth, we have not yet reached ‘peak private credit’. At the same time, the private credit space is expanding beyond middle market lending. Firms are now providing financing solutions to non-PE sponsored companies, large corporates, real estate, and infrastructure.

Asset and fund managers are moving to take advantage of the opportunities created by bank retrenchment. However, diversifying to obtain a slice of the fast-growing private credit pie is not as straightforward for fund managers as expected. Many are finding that their data and operational technology is not capable of speaking the language of private credit.

New strategies, new problems

Fund and asset managers are surfacing new assets and investment vehicles, including pooled loans, CLOs, synthetic risk transfers, fund financing, agricultural lending, and countless others. Each private markets investment strategy brings its own ecosystem, its own language and – crucially – its own data management requirements. As the IMF notes, the private credit boom could present significant market risk to entrants into the space if ambitions are not coupled with a solid foundation of data. Severe data gaps or inefficient data-based workflows may hinder proper risk assessments, such as visibility into credit facility availability and corresponding liquidity requirements, putting firms and their investors at risk.

To prevent front-office ambitions being slowed by back-office capabilities, firms moving into the private credit space need to rethink their data and operational strategies so that they can not only cope with the new levels of complexity that private credit brings – but actually thrive within them.

Cesar Estrada
Cesar Estrada

Nuances of the private credit ecosystem

The private credit ecosystem comes with unique characteristics of factors such as valuations, investment lifecycles, liquidity, and risk. Fund managers need to leverage data in new ways to unlock the right insights and execute smooth operational processes when it comes to investor communications, accounting, and regulatory reporting. Investing in credit instruments involves a number of record-keeping complexities including:

  • Private credit can require custom payment schedules and modeling specificities between loan contracts and credit facilities
  • Firms that act as the lender and are part of an issuing syndicate have a distinct set of processes and new datasets to consider
  • The external party ecosystem introduces datasets from specialized fund administrators, trustees, loan agents, transfer agents, ratings agencies, and borrowers
  • Fundraising and LP reporting requests require access to specific and detailed performance metrics

Data & operations technology needs to speak the language of private credit

When moving into private credit, many asset and fund managers are likely to be dealing with fragmented systems across functions like accounting and reporting, meaning they haven’t yet harnessed the efficiency and insight that a golden thread of data can bring. Add private credit to the mix, and now firms are receiving borrower data, as well as loan attribute and lifecycle updates, from various sources. All of this data is typically fragmented and difficult to manage. For example, without a unified data process, funding memos might be stored on a shared drive, accrual and paydown schedules within Excel sheets, and agent notices within individual emails.

With so many disparate datasets, managers need a unified flow of data powering all operations throughout the entire investment lifecycle, so they can eliminate data redundancy in collecting and normalizing information from internal teams, third party administrators, transfer agents, trustees, and other third parties. Firms’ data management infrastructure must be able to speak the language of private credit, and do so efficiently.

Private credit presents operational roadblocks

Operational processes associated with a move into private credit will see the introduction of complexities across workflows, such as new amortization schedules, custom coupon calculations, rollovers, and other lifecycle events not seen outside of private credit markets. From asset modeling to transaction capture and holdings reporting, systems must be able to properly map tranches of pooled loan investments and term loan contracts to their parent credit facilities. This presents new reconciliation challenges, with firms needing to support intelligent matching logic for both one-to-many and many-to-one reconciliations. Reconciliations will also need to support advanced entity matching for identifier discrepancies.

The power of a unified thread of data

Private credit presents interesting new opportunities for firms across the investment industry to drive attractive yields and risk-adjusted returns – but without the data and operational foundation to support such a move, attempts to break into the space will only create operational failures that risk having the opposite effect on a firms’ bottom line as intended. Moreover, asset and fund managers diving into private credit are going to be left with the need to manage and maintain multiple funds across different investor bases all at once – putting extra strain on any data and operational infrastructure that is already slow, underperforming, or inefficient.

However, those armed with a unified thread of data and intelligent investment lifecycle management technology will have the ability to simplify even the most complex workflows presented by private credit, and to enhance middle and back-office productivity when moving into the space. This enables managers to operate hyper-efficiently in this new asset class, deploy any strategy or fund quickly, and make faster and more informed decisions.

Growth without growing pains

Private markets strategies are only going to continue to evolve in the future, and every new asset class or strategy will bring its own nuances in terms of investment lifecycle processes and data needs - but funds shouldn’t need to rip and replace their underlying technology every few years just to be able to evolve with the markets.

Firms need the capability to rapidly deploy any strategy at scale, and run it successfully and efficiently. They need to bring investors along on the ride, and promptly meet regulators’ needs. This requires data and operational infrastructure capable of supporting all private asset classes – illiquid and tradeable – in a single, connected platform that unites all operational functions with a golden thread of data.

Closing the data and technology gap will give firms the ability to drive competitive edge before a boom reaches a peak.


Cesar Estrada is Head of Private Markets at Arcesium


The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group

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