In the past few years, private credit has emerged as one of the fastest-growing segment of the alternative space. That growth has attracted the attention of institutional investors, which explains why many hedge fund and private equity firms have been eager to diversify into this asset class. Breaking into the market, however, is not easy. Private credit, or private debt, presents unique operational challenges for firms hoping to integrate it smoothly into their asset mix.
In February, SS&C Advent’s Jonathan Eldridge took part in the panel “Achieving Operational Excellence for Private Debt,” hosted by Hedgeweek. Along with his perspective as a technology and operations services provider, the audience also benefited from the experience of a diversified fund management company, as well as a smaller, private debt-focused firm. The engaging conversation illustrated to the audience how to build an all-encompassing, 360-view of their operations and tech-stack when diversifying into new strategies.
As Eldridge pointed out, firms branching into private debt have to be able to “plan for the unplanned.” Compared to other asset classes, processing of private debt is highly manual in nature, without a lot of standardized data that lends itself to automation. The vagaries of cash flows, erratic payments, and loan delinquencies require a fair amount of exception handling. Hedge funds should also be looking at technology platforms that can support both open-end and closed-end fund structures.
A number of important ideas and pieces of advice emerged from the discussion, most notably:
- A strong operational infrastructure for private debt is foundational. Firms should have their operations and technology in order from day one, including outsourcing and in-sourcing decisions, before trying to launch a fund or line up investors. The more advance planning, the more smoothly and efficiently operations will run upon implementation.
- Choosing outsourcing providers requires rigorous due diligence that is likely to be lengthy. Firms should map out what they expect of the relationship and how responsibilities will be divided. Look for providers who are flexible, because there are many nuances to the business.
- The choice of providers is not just about processes, but also about people. Firms should know who will be on their team. As firms work with these people every day, they will want to get along with them, too. They should function as an extension of the business. Be sure they are on board with your vision and mission.
For a deeper dive on private debt and how to achieve operational excellence, the full panel is now available and certainly worth watching. Fund managers who are contemplating expanding into the private debt arena need to be aware of the operational challenges, and can benefit from the experience of firms that have overcome them successfully.
