As strategies become increasingly more complex and burdensome on internal resources, private credit has become a victim of its own success. Barbara Martin, Head of Private Fund Sales, Marie-Christine Bücker, Global Sales Director, and Brian Campion, Commercial Director, Funds, explain how outsourcing can help meet these challenges.
The private credit market has been thriving since the great financial crisis of 2008.
As banks were forced to tighten their lending criteria, an opportunity emerged in corporate financing that sophisticated private investors were happy to fill.
Assets in private credit funds now total USD 1.6tn, a rise of 53% over the past five years, according to our latest report on private credit.
Intertrust Group’s review of work by data analytics company Convergence Research has identified 3,967 private credit funds at the end of March 2022 – a 56% increase since 2017.
Private credit has now spread to activities ranging from aircraft leasing to litigation finance, direct loans and supply-chain finance.
The trend towards diversification has brought higher returns, but also a heavier compliance burden.
The effects of the Great Resignation – on talent recruitment and retention, with ever increasing regulation, time pressure and diversification strategies – mean fund managers need outside partners to navigate the complexities.
The impact of the Great Resignation on private funds
The Great Resignation is far from over. According to a new global survey by PwC, one-fifth of employees say they are likely to switch jobs in the next 12 months.
While the current talent shortage has so far hit the retail and hospitality sector the hardest, it has started to spread to other industries including fund management.
Skilled back-office accountancy, tax and operations staff are becoming scarce and cost more to hire. And as the private equity sector continues to expand, competition for good back-office staff is set to intensify.
Outsourcing back-office operations can help sidestep the challenges of a tight job market and fill resource gaps during peak activity. At the same time, it removes the complexities of managing large teams.
The challenges of evolving regulation for private funds
In the last decade, the Alternative Investment Fund Managers Directive (AIFMD) has been the key framework for the regulation of alternative investment fund managers.
It helped create a single market for alternative investment funds in the European Union by considerably strengthening investor protection and financial stability. It has also allowed non-EU private fund managers to reach European investors without creating a European fund structure.
Recent proposals for its successor, AIFMD II, have highlighted potentially important changes – with tighter checks and requirements that fund managers will have to comply with from the end of 2024 at the earliest.
The proposals, if approved, aim to address the rapid growth of private credit by introducing a so-called product passport for European loan-originating alternative investment funds. While opening up yet more opportunities for private credit, it will add a further layer of compliance.
In addition, since March 2021 fund managers in Europe have had to meet the requirements of the first set of the EU’s Sustainable Finance Disclosure Regulation (SFDR).
The rules aim to make it easier for investors to compare sustainable funds and prevent greenwashing. But they have brought a fresh set of challenges for many investment firms, especially private funds, with increased requests for data, including non-financial information.
The complexity of the legislation, plus the difficulty of gathering the data required, means a lot of uncertainty still surrounds SFDR.
While fund managers need to focus on managing their investments in an increasingly more uncertain environment, they can easily be distracted by the day-to-day demands of running a fund.
The increasing complexity of the private credit market
More new funds are launched in private credit than in any other fund strategy. According to our review, private credit funds have increased assets under management by USD 475bn over the past five years.
Private credit funds invest in anything from direct lending to more niche strategies like sports finance, for example. This requires specialised expertise, with increasingly complex loan agreements raising operating costs.
Meanwhile, many strategies have relatively short lives, which can add to the difficulty and pressure on management.
This means that the instruments traditionally used for vanilla strategies – for example, robo-advisors, online automated platforms that provide digital financial advice based on mathematical rules or algorithms – are no longer suitable in the private capital fund space.
The complexity and growing challenges make it harder to manage a fund without many years of expertise and constant need for customisation.
For example, each private debt each deal is negotiated between lender and borrower to include specific, complex terms and conditions.
These essential processes must be executed by specialists who have accumulated years of expertise in the private capital sector.
How Intertrust Group can help with private credit
The variety of data required to run a successful strategy, meet investors’ demands and comply with regulatory requirements can be overwhelming.
At the same time, the diversity of assets makes it difficult to standardise reporting and make the best use of the data collected.
At Intertrust Group, we have highly professional and specialised teams for this purpose, who are able to meet global and diverse requirements.
Our specialists are supported by bespoke automation systems that allow a fast and monitored process.
This means we can tailor the presentation of the enormous amount of data to meet strict regulatory and investors’ requirements with individual and customised software solutions.
Why Intertrust Group
- Intertrust Group is a publicly listed company with more than 70 years’ experience providing world-class trust and corporate services to clients around the world.
- Powered with the latest technology, our proprietary IRIS client portal can provide a holistic view of your entire portfolio, with users able to access key data and documents 24/7 from anywhere in the world.
- Intertrust Group’s expertise and innovative systems ensure that data is prepared transparently, accessible at any time and in line with a limited partner and regulatory requirements.
- Come and meet us at SuperReturn in Berlin between 14-17 June to find out how we can help you accelerate the possible.
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