By Senior Consultant, Eliana Boyd.
Asset Managers are scrambling for a piece of the ‘private credit’ business. More and more asset managers are considering investing in this area because of the consistency in returns and the need to generate alpha in today’s economic landscape. It is often called a “golden moment” by many industry experts, due to the availability of liquidity and desirable returns amidst rising interest rates and tightening liquidity in public markets. However, as this space becomes more saturated, it is important to note several operational and system considerations when it comes to private credit and requirements to support the business. I have outlined below several areas of interest surrounding private credit and the operating model challenges it can impose.
How can asset managers scale their private credit business using technology? The short answer is, ‘it depends’. Scalability is highly dependent on key organisational factors centred around innovation and costs. Supporting ‘loans’ as an asset class has intricacies surrounding lot level and contract level information - which impacts how data is handled by a system. The entire concept is supported by a few technologies today, with less than five large players with a significant market share.
A vendor analysis is crucial at any stage to stay current with the latest technology. Most asset managers focus on use cases that have proven successful with a hesitancy to be a beta user. There are only a handful of technologies with a large market share - but they are falling behind new cloud native technologies that have shifted towards a one-size-fits-all-solution in front-to-back processing.
There is also a demand for portfolio management tools to ‘slice and dice’ data across exposures that impact the investment decision process. Most asset managers would historically build in-house solutions or incur additional costs after an implementation. More than ever, the ability to make investment decisions based on the visual aggregation of data becomes an important consideration in scaling your private credit business.
Private Credit is heavily reliant on manual operational processes including settlements and security master data. The manual refers to an operations analyst “closing a loan”, entering data into security masters from credit agreements and rolling rate-set notices after every contract expires. Despite us seeing strides with new technology firms to get agent banks on the same platform/network, there is much work to be done on that front so that everyone recognises one golden source of truth.
The question then becomes: do you move towards a managed services model, or do you build an operations team to handle the volume? Most organisations follow a hybrid model where a service provider will handle most of these tasks and the local operations team handles additional reporting requests from the front-office.
In summary, as you continue to navigate private credit, consider scalability and data management efforts at the forefront of your initiatives. I’ll leave you with a few questions that Liqueo use to make informed decisions on operating models – so you can include them in your toolbox.
Does your organisation value innovation and is it willing to partner with new technology to design your own solution and be at the forefront of cloud native technologies?
Are you a mature business diving into a new asset class where the existing technology does not support loans as an asset class – and would you have to create workarounds? Are you willing to embark on a new project to replace existing technology?
Are you a new business setting up shop and considering utilising managed services to process loan activity but willing to accept an increase in operational costs?
Are you an existing business in the brink of renewing licenses willing to run an RFP and complete a new implementation?
At Liqueo, we are here to help our clients navigate private credit. We focus on change and transformation initiatives so clients can focus on their bottom line and grow new lines of business within the private markets space. If you need help with the above questions or any others, do contact us.
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