The global alternatives market has experienced both strong growth and continued resilience with AUM across all asset classes increasing at a CAGR of 10.7% from 2015 to 2021. Private credit (also known as private debt) is the third-largest asset class in the global alternatives space and has experienced unprecedented growth during a similar period, reaching $875 billion AUM by the end of 2020. Analysts predict a CAGR of 11.4% for private credit going forward, with AUM expected to reach nearly $1.5 trillion by 2025.1
Why Is Private Credit Gaining Momentum?
The growth of private credit is often attributed to the low-interest rate environment, which has driven investors to seek alternative investment options with higher yields than traditional fixed-income instruments. Over the past decade, for example, private credit has generated higher yields than most other asset classes, including 3-6% over public high-yield and syndicated loans.2 In addition, private subordinated and mezzanine strategies provide attractive financing further down the capital structure. Private credit is also gaining popularity due to its lower default rates and diversification opportunities.
As a result of all these factors, private credit, and private debt firms can capitalize on current market conditions by raising funds and expanding underwriting capacity. Borrowers are willing to pay a premium for the certainty, agility, and customization offered by private lenders, leading to a surge in demand for private credit.
While this surge in deal volume presents opportunities, it also poses new challenges for private credit and private debt firms. One of the most significant issues is performing thorough deal evaluations while maintaining underwriting quality. As deal volumes increase, firms must navigate the operational complexities associated with processing, documentation, and portfolio management, all at scale.
Technology Enables Efficient Risk Management and Operational Efficiency
To address this challenge, private credit, and private debt firms are turning to technology. With digital platforms fed by harmonized data, fund managers can perform risk analysis at the click of a button – and that’s just for starters. Other benefits include:
- Robust portfolio management and real-time monitoring of investments, which provide insights into performance, risk exposure, and liquidity. Automated data management streamlines deal evaluations, improves decision-making, and enhances risk management. Automated deal processing and documentation also play a vital role in streamlining workflows, reducing manual errors, and increasing operational efficiency. Additionally, managing front-to-back workflows in an integrated platform can help address regulatory reporting requirements, ensuring accuracy, transparency, and compliance.
- Effective risk management, which is critical for sustainable growth in private credit and private debt. Regular risk assessments, stress testing, and scenario analysis are essential for identifying and quantifying risks associated with portfolio companies. Diversification across sectors and geographies helps mitigate concentration risk, while monitoring of portfolio companies allows timely identification of potential stress points and proactive risk mitigation.
- Portfolio monitoring, is an equally important component of any private credit solution because it allows funds to track various data sets and identify any delays in capture. Taking relevant actions becomes easier when investment professionals can see all of the data associated with portfolio companies in a single dashboard.
- Enhanced operational efficiency and optimized costs. By leveraging technology solutions, such as portfolio management systems, data analytics tools, and automated processes, private credit, and private debt funds can improve operational efficiency and reduce manual errors. Standardizing critical processes with technology also ensures consistency, reduces duplication of effort, and improves overall operational efficiency.
How IVP Can Help
Complexity defines the credit space. In private credit and private debt funds, managers must fund deals quickly while accelerating due diligence and managing risk for bespoke deals. The IVP for Credit solution is specifically designed to help funds manage this complexity efficiently. It is a comprehensive, automated platform that helps private credit and private debt funds execute deals more quickly, adapt to change more easily and maintain an elite level of agility throughout the investment lifecycle. Core capabilities of the IVP for Credit solution include the ability to:
- Provide 360-degree views of deals during due diligence and post-funding
- Consolidate credit quality, covenant compliance, UW thesis, and current projections
- Handle investor requests efficiently with a complete deal history
- Manage the deal pipeline efficiently with workflows and checklists
- Standardize due diligence processes across the entire investment team
- Track portfolio company financials as well as track covenants and KPIs
- Manage tasks, reminders, notes, meeting schedules, and updates on the go
- Automate tracking of all data delinquencies
- Generate insights with portfolio management and analytics
- Ensure a robust, audited expense allocation process to LPs and regulators
- Manage cash projections, liquidity, and forecasting in a consolidated view
As an industry-leading credit solution, IVP for Credit accommodates all aspects of a private credit or private debt fund, providing all the functionality lenders need to analyze borrower credit, perform risk management, define and track custom covenants on a per-deal level, codify robust deal approval processes and checklists, manage deal pipelines, and assess borrower risk by monitoring financials, covenant compliance, and operating KPIs.
1 2022 Preqin Global Alternatives Reports. Available at: https://www.preqin.com/insights/2022-preqin-global-alternatives-reports
2 “Understanding Private Credit,” Goldman Sachs, October 2022. Available at: https://www.gsam.com/content/gsam/us/en/advisors/market-insights/gsam-insights/2022/understanding-private-credit.html
Latest blogs delivered right to your inbox
Resources For Growing Your Firm
IVP’s FinanceForward Thinking
Discover the latest trends, find out how your peers are accelerating their digital transformations, get updates on evolving products, and more.