An Out-of-the-Box Solution for First-Time Credit Fund Managers

Since the Global Financial Crisis and resulting changes in financial regulations have forced banks to curtail lending, private credit lending platforms have been steadily gaining traction. Lending to middle market companies, however, creates its own unique set of complexities for even the most seasoned asset managers.

Banks have pulled back lending, investors have begun demanding more liquid returns and distributions, and private credit investments remain a sellers’ market. These facts all point to continued growth in the private credit sphere.

PDI recently revealed that the market is expected to reach the $1.4 trillion mark by 2023, surpassing real estate to become the third-largest alternative investment class, just behind hedge funds and private equity.

Historically, many of the funds launching these platforms are private equity firms. Others include mutual funds and traditional broadly syndicated bank loan managers. Their choice to launch private credit arms has overarching implications and can bring them a variety of unique challenges due to the varying infrastructure and operating models.

What are the challenges?

Director Greg Myers explains what he sees as the main challenges faced by asset managers when they opt to launch private credit lending platforms.

“We’ve seen an influx of new managers looking to take advantage of the rising capital flows associated with private credit, many of whom come from outside the credit world where things operate differently.

“Private equity firms, for the most part, have very lean back office operations. The loan market presents its own back-office challenges that don’t easily fit into existing private equity infrastructure. Not only do they require a different style of accounting, they also require credit monitoring, financial reporting, tracking spreads, accrued interest, and so on. The difference between the two is undeniable when you take a look behind the curtain.”

What are managers’ options?

Hiring an entire suite of staff to fill the necessary roles in a private credit lending platform is certainly an option, but is likely the most complex and expensive option as well.

Greg explains that “the staff working for a credit firm must absolutely have familiarity with the credit market. Managers could build their own team of accountants and operations specialists but finding talent with the necessary level of know-how is a massive time and resource drain.”

A practical solution

Rather than filling the back-office themselves, Greg says that asset managers can alleviate the cost of a full in-house support model by partnering with a third-party administrator with credit expertise.

“Asset managers who partner with third-party administrators are able to maintain control of their operations and focus on closing deals. But no two administrators are created equal, so it’s important for them to choose a partner with deep experience in the credit world.

“At Alter Domus, administering credit platforms is not something we’re learning on the go; it’s one of our core activities. We help managers venture effectively into the loan market by giving them a practically out-of-the-box solution so they can hit the ground running. From loan agency and administration to borrowing base support, loan trade settlement and full fund administration, our vertically integrated solution means that we’ve got everything set up for those managers looking to embark on a private credit platform.

“Rather than bearing the overhead costs involved with hiring the back office team one-by-one and deploying credit-specific asset and portfolio reporting platforms, we see clients coming to us because our solution is established and proven, giving them time-savings, cost-savings, and most importantly peace of mind.”