Alternative Credit Council: Loan Administration Needs To Be More Robust
Private credit managers say that loan administration needs to become more robust in order to meet the rising demand for loans in a new report by the Alternative Credit Council (ACC), the private credit affiliate of the Alternative Investment Management Association (AIMA).
Some 90% of private credit managers identified various challenges in loan administration in Enhancing the Loan Administration Function: Marrying capacity and customisation, the first survey of its kind by the ACC, sponsored by BNP Paribas Securities Services. Credit Managers acknowledged that improvements were needed, both in their own systems and in services provided by third parties, to enable the sector to continue to grow rapidly.
The ACC surveyed private credit managers with a combined $120 billion committed to private credit, approximately 20% of the global industry’s committed capital base. The main finding is that nine out of 10 private credit fund managers face challenges when administering their loans. The two most common challenges, cited by 45% of respondents, were reporting requirements to both regulators and investors and the limitations of existing loan-tracking systems.
The paper found private credit managers are building more efficient back-office operations in order to overcome those challenges and meet the needs of institutional and retail investors.
Almost half of the respondents said they already use third-party service providers to support the in-house function, while 70% said they recognise that service providers could help them better manage non-traditional loans. At the same time, there was recognition in the report that many firms could not rely entirely on off-the-shelf solutions, given the level of customisation in the industry and the still paper-based nature of many loan agreements.
Demand for private credit has grown significantly in recent years, as it has offered borrowers access to finance and investors access to higher returns in a low global interest rate environment. The ACC estimated in a report in 2017 that the private credit industry would reach $1 trillion in assets under management globally by 2020.
ACC Deputy CEO Jiri Krol said: “The private credit industry is maturing, and dealing with rapidly growing demand for its services. As such, both smaller and larger private credit managers are faced with the need to upgrade their internal infrastructure or to partner with sophisticated service providers in order to keep pace with their growing businesses.”
Ian Lynch, Head of Alternative Investors at BNP Paribas Securities Services said: “Private credit is a key segment of the investment management industry and one which is playing a growing role in the real economy. However, it also presents a range of challenges to fund managers from an operational perspective. As private credit remains a relatively illiquid physical loan investment, fund managers require specialist systems and operational knowledge that support different credit strategies and instruments, while reporting to both clients and regulators can be complex. Fund managers need to adapt accordingly.”