Private markets, including private credit and debt, have seen prolific growth over the last few years in the wake of the global health crisis. This growth is attributed to many factors including investors seeking new opportunities to diversify their investment portfolios. As noted in a recently published Hedgeweek special report, Customising the portfolio accounting experience relies on superior technology, “European private credit managers alone [are] sitting on $93 billion of capital at the end of last year, according to Preqin figures.” [1]
In response to this expansion, investors are offering a variety of private credit and debt strategies to accommodate the keen demands of their clients. As the complexity of how these funds are structured increases, sophisticated investors that employ credit and derivative instruments observe that these are among the most challenging investment types to account for. Reliance on accounting systems built for traditional portfolios, or worse, on spreadsheet-based processing, is not only inefficient, but it also runs a high risk of errors. As discussed in the Hedgeweek report, these highly customizable, illiquid offerings have created new and burdensome operational complexities for managers to deal with, including managing:
- Bespoke rules for cash flows, which can vary both by investment and investor
- Both scheduled and ad hoc payments
- Loan defaults and amortization schedules
- The accounting and valuation for multiple legal entities, each with its own LP-specific waterfall calculations1
Firms should be confident that the solutions they are using are powerful, dynamic, and are equipped to handle their diversified strategies and investment requirements. Specially, these solutions should mitigate risk and eliminate the manual processes that these complex investment strategies often create. For many firms, modernizing its technology stack and engaging new solutions can help to temper some of the challenges, as well as provide peace of mind for their investors.
There are significant operational challenges and investment risks associated with private credit, yet when the strategy succeeds, the rewards are phenomenal relative to market returns. As this market continues to gain traction, managers will require solutions for tracking and allocating complex portfolios and transactions. To learn more about the growth in private markets and how to alleviate the operational complexities associated with these asset classes, read this Hedgeweek special report on Customising the portfolio account experience relies on superior technology.
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[1]“Customising the Portfolio Accounting Experience Relies on Superior Technology.” Hedgeweek, 10 Jan. 2022, https://advent.com/resources/all-resources/industry-report-customising-the-portfolio-accounting-experience/
