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How APAC managers can effectively expand their private credit operations

14 Sep 2023

By Vanessa Lopez, Head of Delivery, Loan Services

Asia is in the midst of a boom in private credit funds. According to Reuters, at least $2.5 billion in new private credit funds have been launched or planned so far this year, targeting start-ups in Asian markets. In 2022, private credit funds targeting Asia, Africa, Latin America, CEE and the Middle East increased by a massive 89%.

Private credit is an exciting and largely untapped frontier in Asia—but it’s also a complex asset class that requires specialised administration and management. As more managers in the Asia-Pacific (APAC) region participate in the credit market, many are struggling to understand their obligations to investors.

In this post, we’ll explore considerations for fund managers entering this space to help manage their growing portfolio of loans and achieve their target operating model.

The rise of private credit in APAC

Private credit is financing provided by a non-bank lender, such as an investment fund, and functions as an alternative to debt financing from banks or capital markets. Across the globe, private credit has grown exponentially over the past decade, nearly tripling in AUM between 2010 and 2020 to become the third-largest alternative asset class.

In 2022, fundraising in Asia exceeded European totals in the first half of the year, and direct-lending players such as Blackstone have recently announced plans to expand their operations in Asia.

Among the reasons for this increase are:

  • Regulatory changes for banks and a challenging lending environment
  • Small and medium enterprise (SME) demand for credit
  • Start-ups moving away from raising equity capital in a ‘down round’
  • Greater investor interest in private credit

What do LPs expect?

Despite the flurry of activity in Asian markets, private credit is still a nascent part of the private markets and new entrants into the market don’t have the middle- or back-office experience to effectively manage their loan portfolios in-house.

Many managers seek to understand what LPs expect and what they should do to meet those expectations.

After decades of experience in the private credit space, we’ve found that LPs have two primary expectations:

  • Maximum return on investment: LPs look to managers who can focus on key investment functions and minimise their operational cost
  • Effective risk management: LPs expect managers to perform extensive due diligence on their credit portfolio to demonstrate that they effectively manage returns and default risks

Operational challenges of private loan administration

In seeking to meet these expectations, unique operational challenges face managers who have not yet established an in-house administrative model for private credit portfolios.

  • First, managers must look closely at how they can achieve a target operating model to help track, manage and report both portfolio performance and the underlying covenants and attributes of loans
  • Second, they must adopt best-in-class technology to ensure quality, scalability and security for their loan database
  • Finally, managers must assemble an experienced loan operations team to meet operational efficiency expectations. A knowledgeable loan administrator is critical to improving efficiency and managing risk in private credit operations

Outsourcing for cost savings and greater efficiency

For many managers the precise operational requirements mean significant time and cost to implement new systems and hire the right staff. Outsourcing to a specialist service provider is the most effective option for private credit managers without the relevant expertise or infrastructure in-house.

The benefits of outsourcing include:

  • Cost efficiency: Outsourcing allows managers to charge administration as a cost to the fund rather than to themselves as manager (as it would be if they were to build out the infrastructure themselves)
  • Expertise: Expanding into any new asset class requires familiarity with its nuances, and private credit is no exception. Outsourcing enables firms to leverage the industry expertise of long-time professionals without the time and cost of assembling an in-house team
  • Technology: An outsourcing partner like IQ-EQ can provide access to best-in-class technology platforms such as Allvue and Investran FIS

How IQ-EQ can help

IQ-EQ’s managed loan services are designed to ease some of the pain of implementation. We pair best-in-class technology such as Allvue and Investran with our deep understanding of the private credit asset class and our experience as a global service provider.

Learn more about how IQ-EQ can help you manage your growing loan portfolio. Contact our expert team today.

Working with IQ-EQ has been seamless – you and your team understand our business, advise us appropriately, and handle your side of our collective partnership so that we can focus on making good investment decisions. Evan Gibson SVP, Merchants Capital

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