The success of the relatively nascent private debt industry is already well chronicled. The latest data from PDI show that, in 2016, private debt fund managers amassed $111 billion across 151 funds. The number fell short of its previous peak – $180 billion in 2013 – but viewed in the context of a year that weathered the uncertainty of Brexit and a new US president, the numbers remain impressive.
What is less well chronicled is the impact this growth has on the industry that arguably oils the engine of this growing market: third-party providers of fund administration and corporate trust services. While fundraising failed to break records in 2016, it is worth noting that individual private debt managers are, on average, still growing their assets under management.
According to PDI data, average private debt fund sizes rose to $735 million in 2016 from $651 million the previous year. Not only is this trend expected to continue, but the possibility of industry consolidation could yet see even larger vehicles raised further down the line. As managers scale up their operations many will be forced to decide whether they want to invest in themselves or look to third-party fund administrators needed to deal with the inevitable increase in their back office workload.
But it is not just about issues of scale. The growth of the alternative credit industry has attracted considerable regulatory attention leading to further legislation both a country and regional level, putting greater pressure on fund managers. Meanwhile, more competition in the industry is encouraging managers to specialise. This has implications for their operating models. The complex nature of the most attractive assets now translates into yet more burdens on managers looking to bolster investor returns.
To rise to this challenge, private debt fund managers are turning to experienced, scalable third-party providers offering fund administration, loan administration, reporting and accounting solutions that can offer a platform for growth. The fund administration industry, in turn, needs to evolve and specialise to meet the needs of these fund managers. As this report reveals, it is a process that has already begun.