Private Credit Outlook: Scalability, Technology, and Outsourcing

By Piyush Singhi, Senior Managing Director, IVP Credit and Private Funds, and Obinna Nwankwo, Managing Director, Wellington Management Company.

This article was produced by Indus Valley Partners as part of their valued industry partnership with Fund Operator.  

The following represents highlights of a longer conversation between the two buy-side experts as part of a webinar organized by LPGP Connect about key platform considerations for launching or scaling a private credit business.

Credit as a whole has experienced significant growth, increasing more than six-fold since the financial crisis of 2007-2008. Within this space, the private credit market has grown substantially with total AUM reaching $1.7 trillion in 2023, up from $440 billion in 2014. Many expect continued growth in private credit, with another doubling or tripling in AUM over the next five to 10 years.

Right now, direct lending dominates this growth. This reflects a few important factors, namely that banks are pulling away from lending, and non-bank lenders are stepping in to fill the vacancy. It emphasizes one of the primary reasons why borrowers prefer private lenders, which is their unique combination of flexibility and reliability. These qualities are especially important during challenging economic environments, including the COVID-19 pandemic. Finally, direct lending remains the primary strategy because companies are simply staying private longer.

This makes a lot of sense, given the substantial amount of capital available. Direct lending offers a balanced risk-return profile, making it attractive for traditional asset managers seeking higher yields than traditional fixed-income instruments.

What makes private credit different

That being said, private credit differs quite a bit from traditional asset classes like equities and fixed income. Most importantly, it presents unique challenges, most notably a lack of data transparency and centralized data providers, such as Bloomberg or pricing providers.

This is critical because private credit relies heavily on cash flows. In the private equity space, for example, there may be distributions once or twice in the deal lifecycle. In private credit, cash flows are monthly and quarterly, and it is imperative to ensure those cash flows are correct.

This means firms must have meticulous management and validation of cash flow data to support successful investment decisions. However, it can be incredibly challenging to aggregate and analyze data across various strategies within private credit.

Download Whitepaper: Overcoming Complexity In Credit Funds

Another key difference in private credit is flexibility. Private credit contracts offer a great deal of flexibility, which is what makes them attractive in the first place. However, flexibility brings its own set of challenges that are not part of more standardized asset classes.

The key takeaway is that if you are considering launching or scaling up a private credit business, the complexities of the asset class may make it more difficult than usual to drive growth effectively. In other words, firms will need to take steps to ensure that expenses are not growing proportionately with raised funds and AUM — especially when it comes to technology and services.

Starting with strategy

When designing any operating model, there are three key components: people, processes, and technology. In this situation, technology can be any tool that enables the deployment of your operating model.

When building or scaling the support function in the private credit sector, it is crucial to start by taking a step back and working closely with the product team to understand the full product roadmap. Private credit strategies can vary significantly, from traditional secured loans to specialty finance. Understanding the roadmap for your particular strategies will help define the criteria for any technology system or platform.

Watch On-Demand Webinar: How Technology Fuels Efficient Expansion in Private Markets

Secondly, it is advisable to build these key considerations into your core operational systems, whether they are already in place or planned for implementation. Core operational systems include market and investor relations, deal and portfolio management, and fund administration functions. In other words, start by developing criteria and capabilities to support these functions comprehensively.

Finally, use these requirements to engage technology providers and platforms, identifying which areas are best for in-house development, outsourcing, or external technology integration.

Evaluating technology partners

When it comes to technology platforms for private credit, flexibility is what enables firms to structure the non-traditional offerings that attract borrowers to private lenders. By the same token, however, excessive flexibility can raise compliance concerns.

What private credit firms need are technology and processes that are both portable and flexible, so they can be quickly adapted and expanded as necessary. This agility is critical as your firm’s private credit products evolve from simple to complex. Ideally, you want to be able to create new fields and functionalities very rapidly, without a six-month coding project.

When assessing potential vendors, it is also crucial to look for platforms that can handle credit instruments effectively. In other words, focus on platforms specifically designed for private markets, as opposed to platforms that are adapted from public market systems. This ensures compatibility with the complexities inherent in private credit, such as managing revolvers and amortization schedules. Another key consideration is robust workflow tools, which streamline processes and enhance collaboration among team members.

Read Blog: Why a Flexible Infrastructure Is Mandatory for Private Market Alternative Asset Classes

Using these criteria will help mitigate risks while maintaining meticulous control over operations. Ultimately, the vendor selection process comes down to finding partners who are already equipped to navigate the intricacies of private credit seamlessly, so the firm can focus on innovation and growth.

Key considerations for outsourcing

When contemplating outsourcing, it is important to start with an understanding of the desired size and scope of internal operations.

Wellington, for example, decided from the outset to prioritize highly skilled personnel proficient in analyzing asset classes rather than performing routine data entry tasks. For this reason, Wellington sought an outsourcing provider with extensive expertise that was already capable of handling various fund iterations and addressing emerging challenges creatively. Today, through a strategic partnership with Indus Valley Partners and by utilizing their IVP for Credit Platform and IVP Managed Services, Wellington leverages specialized knowledge while focusing our in-house efforts entirely on strategic analysis and decision-making that drives efficiency and innovation.

Another important quality for an outsourcing partner in private credit is, of course, a deep understanding of the intricacies of credit instruments beyond the technological capabilities. This level of comprehension, such as the ability to understand private credit terms like revolvers and DDTLs, is pivotal.

Expending time explaining these concepts to outsourcing partners will hinder progress significantly. It is much easier to choose a partner who already has this knowledge, which ensures a smoother onboarding experience and more effective collaboration.

Moving into action: onboarding and implementation

When the technology and outsourcing partners are selected, onboarding is the next phase. At this point, no amount of meticulous pre-planning is too much. Rushing into implementations without thorough preparation can lead to prolonged timelines and inefficiencies. Extensive pre-planning should include rigorous analysis of the product roadmap and thorough vetting of selected partners.

By investing time and effort in pre-planning, firms can lay a solid foundation for smooth project execution. This includes defining clear objectives, vetting potential partners, and mapping out implementation strategies. Starting early allows teams to identify and mitigate potential risks, set realistic timelines with built-in buffers, and allocate resources effectively.

It is also vital to establish clear communication pathways among internal stakeholders and manage expectations from the outset. This approach enables the timely identification of issues and facilitates swift corrective actions. By fostering an environment where concerns, feedback, and thoughts can be voiced openly, teams can collaborate more effectively to tackle new challenges and drive progress. It also helps ensure potential obstacles are addressed promptly, leading to smoother project implementations and better outcomes.

Download our case study to know how the combined power of the IVP for Credit platform and the IVP Managed Services enabled a credit fund to completely replace manual workflows and disparate data to boost enterprise-wide operational efficiency.

Of course, circumstances do not always allow a perfectly planned implementation. There will be times when a firm is building a new platform while simultaneously using an interim solution, such as traditional manual spreadsheets. In these cases, it is vital to prioritize the resources and expertise required to minimize the transition time. Relying on an “interim” solution for too long will hinder progress.

That is why firms must ensure they have enough knowledgeable people dedicated to the project. This includes hiring the right talent and allocating sufficient time to work closely with providers. Building a robust platform requires focused effort and commitment, and relegating this kind of work to a “part-time” priority is unlikely to yield satisfactory results. Investing in ample dedicated resources ensures the project receives the attention and expertise it deserves, leading to a successful outcome.

Future outlook: the evolution of private credit

The private credit environment continues to evolve, particularly as more private equity managers venture into the private credit space. Firms should keep this continuous evolution in mind when building or scaling technology and support processes.

As private credit evolves, in other words, firms must adapt technology and processes accordingly. This includes considering the unique demands of the asset class and ensuring systems can support these complexities effectively. Private equity managers, for example, may not realize that using the same systems and processes as private equity may not hold up in private credit. Firms should instead prioritize dedicated technology specifically designed for private credit and investing in systems capable of supporting diverse debt structures and evolving alternative asset investment strategies.

Embracing dedicated technology and processes helps firms position themselves for success. For example, maintaining a competitive edge in private debt products — without lowering interest rates — requires strategic deal structuring. Firms can more effectively differentiate by offering flexible terms and conditions tailored to borrowers’ needs. This may involve adjusting covenants, providing more flexibility, or customizing deal structures to accommodate specific requirements.

Download Factsheet: Maximize Private Debt Efficiency and Transparency

Overall, focusing on value-added services and creative deal structuring will allow firms to justify interest rates while remaining competitive. Additionally, leveraging data insights from past deals can inform strategic decisions and enable firms to negotiate from a stronger position and drive value for both borrowers and lenders.

Learn more about the IVP for Credit platform or contact us to set up a live or online demo.