Blog > Private credit: Navigating growth and challenges in a booming market

In recent years, the private credit market has experienced unprecedented growth, doubling in size to reach a staggering $1.65 trillion by the end of Q3 last year. This remarkable expansion, which began in the aftermath of the financial crisis and accelerated during the pandemic, has reshaped the landscape of alternative investments. It is clear that private credit has become a force to be reckoned with in the financial world.

The perfect storm for growth

The surge in private credit can be attributed to a confluence of factors. The pandemic created a unique environment where rescue finance became crucial, supporting stressed businesses and opening up new opportunities for lenders. Simultaneously, structural tailwinds in the non-bank lending sector have continued to propel the market forward.

Key sub-strategies within private credit have emerged as particularly attractive, including mezzanine financing, real estate debt, distressed debt, and direct lending. The latter has proven especially popular, accounting for a significant majority of all fundraising. This diversification of strategies has allowed managers to tap into various market segments and risk profiles, further fuelling the sector’s growth.

Investor trends

The investor landscape is evolving, with family offices emerging as the top target for general partners (GPs) seeking new allocations in private credit. This shift reflects the growing appeal of private credit among sophisticated investors looking for yield in a low-interest-rate environment.

Operational challenges and technological solutions

As the private credit market expands, so do the operational challenges that confront managers. The sheer volume of loan data, often managed manually via PDFs, presents a significant hurdle. With loan structures often being complex and customised, it’s critical that firms digitise their data and streamline processes – middle-office reporting and back-office accounting and reporting should be a big focus – as my colleague Aani Nerlekar highlighted in a recent industry webinar: “Firms need to use technology to easily digitise it and bring it all together, enabling faster processing, more accurate reporting, and ultimately, improved operational scalability. Firms that fail to address these inefficiencies risk missing out on the very returns they are hoping to capture”.

Technology adoption is no longer a luxury but a necessity in this rapidly growing market. Managers are actively reviewing their in-house technology capabilities, with larger firms leading the charge. The ability to efficiently manage non-standardised loan data through advanced solutions like SS&C Loan Data is becoming a key differentiator in the industry.

The rise of outsourcing

As the complexity of managing private credit portfolios increases, many GPs are turning to outsourcing as a strategic solution. This trend is particularly pronounced among smaller asset managers who face challenges in borrower sourcing due to limited resources. Outsourcing not only provides access to specialised expertise but also allows firms to focus on their core competencies while reducing operational burdens.

Looking ahead: opportunities and considerations

The private credit market shows no signs of slowing down, with projections suggesting it could double again by 2028^[1]. However, success in this booming market requires careful navigation of both opportunities and challenges.

For new entrants, particularly hedge funds venturing into private credit, partnering with administrators and leveraging outsourcing solutions can help overcome the high costs associated with building in-house expertise. Established players, on the other hand, must focus on operational efficiency and technology adoption to maintain their competitive edge.

As the market matures, managers would do well to explore less mainstream strategies with strong origination pipelines. This approach, combined with a focus on operational excellence and strategic use of technology, will be crucial in capitalising on the continued growth of private credit.

The private credit market stands at an exciting crossroads of opportunity and innovation. By embracing technological advancements, strategic outsourcing, and a keen understanding of market dynamics, managers can position themselves for success in this rapidly evolving landscape.

The webinar discussed information from a Hedgeweek Insights Report, “Private Credit: Trends, Technology, and Future Trajectory“. The report is based on a survey of hedge fund managers and interviews with leading private credit participants. It provides expert assessments of the market’s state and direction and concludes that operational performance is critical to success.

Watch the webinar and read the report for a comprehensive analysis on the private credit market today and its future.

[1] Preqin, “Preqin forecasts global alternatives AUM to rise to $29.22tn by 2029”. September 2024 https://www.preqin.com/insights/research/blogs/preqin-forecasts-global-alternatives-aum-to-rise-to-usd29-22tn-by-2029