CFOs and COOs Forum: Adding a credit strategy presents back-office challenges

The growth in private credit presents plenty of upsides for private equity firms but also offers real challenges for CFOs and COOs.

It’s no secret that private credit has boomed post-global financial crisis. It’s also increasingly clear that bolting on a product for the asset class to a private equity platform is more difficult than simply raising a drawdown fund for credit rather than buyouts, secondaries or another equity strategy.

Attendees at PDI sister title Private Equity International’s annual CFOs & COOs Forum in New York last week included more than 600 delegates from private equity shops, several of which have launched private debt businesses in recent years. But back-office functions for the strategy require a very different skillset, the attendees said.

Expanding into new strategies is something a lot of private equity firms are thinking about. Thirty-five percent of private equity CFOs surveyed by EY said their firm also offers a private credit product. Asset growth is a top strategic priority among those surveyed, and 59 percent said launching new strategies was at least a part of their focus in the quest to achieve that.

Tracking private equity strategies is much more routine than doing so for credit strategies, one CFO noted. Following debt investments can be more unpredictable, too. Several responsibilities not necessarily associated with private equity, such as tracking loan drawdowns, interest payments and monitoring loan balances, are all labour-intensive and require a larger staff.

In fact, one attendee that works at a firm with both credit and equity platforms noted it would be an easier task to add a buyout strategy than a credit strategy.

Unfortunately, there seems to be no one-size-fits-all solution. The sentiments echo what many CFOs said at sister publication Private Debt Investor’s inaugural PDI CFOs & COOs Forum in June.

“Some of the finance and compliance professionals in the room had a seemingly simple question: is it better to outsource fund administration, loan monitoring, accounting and the like, or should those capabilities be brought in-house? The consistent answer: it depends.” PDI reported at the time.

There are more than just back-office functions to take into consideration. Investing in private debt and private equity can lead to a central question: should you take equity and debt positions in the same company? Either way, disclosing those conflicts of interest are important, one PEI conference panellist said.