Posted on 06 July 2022
Building Relationships Between Private Credit Managers and Investors
Featuring Paolo Malaguti
As investors continue to actively seek better risk-reward opportunities across the private credit spectrum, investors need to keep their finger on the pulse of portfolio performance, according to Paolo Malaguti, Head of Credit-Vision at Alter Domus.
Investors continue to be drawn to private credit as an asset class capable of demonstrating impressive resilience during volatile market conditions, and also finding innovative ways to help companies reinvent themselves as the world emerges from the pandemic. The events of the last two years have underscored the importance of analysing risk and sharing information with stakeholders. It has also helped underline the need for diversification, flexible risk management and positioning portfolios for change.
Private Shouldn't Mean Inaccessible
Whereas public companies are obliged through their listing status to produce volumes of high-quality data, privately managed assets often suffer by comparison due to a lack of robust, consistent and publicly available information. The self-contained nature of private credit markets means a lot of the due diligence, underwriting discipline, risk assessment and close monitoring of underlying investments goes unreported and undisclosed to Limited Partner (LPs). This is becoming a growing area of focus for those LPs who embrace private credit as an asset class, but who are demanding more insight in line with what is available across the rest of the investment world.
Transparency is Essential
This move towards greater transparency for investors seems inevitable. Investors today are constantly vigilant and mindful of market events and investment trends, and need to know how these could have an impact on credit risk, and ultimately, portfolio returns. Investors also have the internal requirement to ‘categorise’ different credit managers and fit them into their risk/reward matrix. For private credit, the available data only scratches the surface of what investors want to see.
For now, the portfolio manager is the gatekeeper, and the only place where investors can go to obtain such information. This presents something of a challenge for the private credit industry, not so much because of mistrust of the portfolio manager, but because access to clear, transparent information should really be the cornerstone of investment and analysis across all asset classes. Investors should have the means of authenticating what their private credit managers tell them.
Transparency Benefits Skillful Managers Most
Credit managers are the first to recognise the benefits of potential investors having access to a superior standard of portfolio data. For the best credit managers, arguably their greatest challenge is articulating the how and the why of their portfolios. Many know they need to do a better job of explaining why theirs is a better portfolio compared to those run by other managers – whether by offering a superior risk/return profile, conducting deeper due diligence or operating at lower leverage – particularly when other managers are achieving a broadly similar return.
Lack of Resources can Leave Investors Exposed
The second most challenging aspect for private credit investors is the scarcity of resources and time limitations. Most simply do not have the internal capacity to devote enough time to the kind of deep-rooted analysis they would wish for. Of course, a greater amount of work is required from investors, simply because of the lack of a standardised, industry-wide data set to start from.
Traditionally, most have grown reliant on using consultants to relieve them of the research burden when performing due diligence on new funds. However, wide information gaps can often persist. Investors, for example, are frequently ‘left in the dark’ between quarterly investment reports as performance data is only distributed with months delay to quarter end.
Now more than ever, it's vital for investors to be on top of current portfolio performance, not relying on information that was relevant months ago. In periods of significant earnings volatility, the time lag - wherein the investor is left without any insight into how the underlying investments are faring - is simply no longer acceptable.
In 2022, there’s no reason why LPs cannot be in possession of technology that allows them to log-in to see how every credit manager is performing, as well as the underlying performance of the portfolio companies, so they can compare the relationship between returns and risk in real time.
The Hidden Value of Service Providers
So where can private credit investors hope to find this level of transparency and real-time information, if not through consultants? Malaguti believes that service providers have a greater breadth of knowledge and data about private credit managers, and this means they can be invaluable in bridging the gap between managers and investors. The service manager is in an ideal position to keep lines of communication open, sharing knowledge and insight, and ensuring each party is broadcasting and receiving on the same frequency.
But the real competitive advantage comes from service providers offering much more than just data reporting. Service providers have a clear look through across the whole of the market, and can see what others are doing. This means they can provide analysis, benchmarking, and insight, that helps credit managers differentiate themselves, and ensures investors can recognise and understand those key differences.
Levelling the Playing Field
The spectacular growth of private credit as an asset class is well deserved. But as the asset class continues to grow, investors can’t afford to be left in the dark. They need greater access to information and insight that enables them to make informed decisions and achieve optimal investment returns. It’s therefore more important than ever for private credit managers to evidence the qualities and attributes that make them worth investing in.
The most effective way to bridge the information gap is for both to work with service providers who already have the collective data and insight that can only be gained from intrinsically knowing investors and managers. The technology is available: let’s collaborate and use it.
"For the best credit managers, arguably their greatest challenge is articulating the how and why of their portfolios."
Paolo Malaguti, Head of Credit-Vision at Alter Domus
Head of Credit-Vision