Private credit investors hold all the cards in the current market, at least according to one industry insider.
Alex DeSanto, head of private equity at Gen II, has seen first hand how investor demand has shaped the rapidly-growing private credit industry, and how fund managers have responded. For example, DeSanto has noticed that fund managers are becoming more willing to offer enhanced transparency – a far cry from the intensely private nature of the industry in the past.
“I think the investors hold the cards at the moment,” he says. “There’s more scrutiny on the managers, so they’re doing more due diligence on managers and taking their time with their allocations.
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“On the flip side, managers are being more open to bespoke reporting requirements to investors. So investors have the ability to push a bit harder on bespoke reporting.
“They have the power at the moment, in my view.”
It has been estimated that the private credit market is worth in excess of $1.7tn (£1.63tn) at present, but it has been attracting a flurry of interest from institutional investors in recent years, as they seek out higher yields and portfolio diversification. However, these investors are increasingly demanding customisable portfolios and enhanced data transparency.
Gen II is a global business which provides fund administration services to all types of alternative investment fund managers, including private equity and private credit managers.
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“As our clients grow, mature, and diversify, their businesses are growing, but they don’t have time to manage multiple relationships with multiple providers,” explains DeSanto.
“Most of our clients are consolidating as many services as possible with us. They’re trying to give us as much work as possible so they can free themselves up to work on the investment side of things, which is where they should be focused ultimately.”
While DeSanto is optimistic on the future of private credit, he believes that outsourcing will play a vital role in the growth of the sector. This is particularly true when it comes to private equity firms who have moved into the private credit space. Private credit requires a high level of expertise and experience, which many private equity fund managers simply do not have. However, by hiring a fund administrator, they can streamline all of their regulatory and back office services, and focus instead on building out strong teams.
“We’ve seen a few emerging private credit managers who have spun out of bigger firms and they need our support more than some of the bigger players,” says DeSanto. “But then the big players also need our support as they grow in supply.”
As for the future of private credit, DeSanto predicts a rise in trans-Atlantic offerings as more US fund managers seek a European base with a favourable regulatory climate, and European managers look to attract US money.
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“There are a lot of US managers setting up in Europe and looking to develop a European strategy,” he notes. “But also there’s a lot of our clients in Europe looking to set up in US and access US investments and US investors, where Europe isn’t the right product, ultimately.”
Earlier this year, Gen II acquired Crestbridge, a European private capital fund administration service provider with offices in the UK, Jersey, and Ireland. From its new office in Luxembourg, Gen II can work with a wider range of clients, allowing it to adapt quickly to new investor trends while continuing to support private credit firms as they expand globally.