Podcast Series
Scaling Private Credit: Navigating People, Technology, and Data
Kali Jakobi Long:
Welcome to Data Disruption, a podcast all about data problems, solutions and innovations disrupting the private markets. Let’s talk data.
Hi, everyone, and welcome back to Data Disruption. As always, I’m your host, but for the first time with my new married name as Kali Jakobi Long. Today, I have special guest and private credit expert James Jefski with me to discuss the nuances of a rapidly growing asset class and the unique challenges it presents. James, welcome to the show.
James Jefski:
Thanks, Kali. I appreciate the invite and look forward to today’s session.
Kali Jakobi Long:
Awesome. Let’s kick off with a few startling stats. So, I have here from Preqin that private credit’s growth is at 1.5 trillion globally, which has tripled since 2012 and is expected to grow to 2.3 trillion by 2027. James, let’s dig into those growth numbers a little bit. Why are investors so interested in private credit now?
James Jefski:
So, it is pretty amazing, and as someone who’s been riding that wave, it’s amazing to think about just the trajectory of it continuing to go on. It’s fueled by a few different things, right?
So, on the supply side, on the investment side of things, the environment is there for non-bank lenders to step in and provide credit to private companies, which is when we talk about private credit, by the way, that’s a broad spectrum of different investment types, but I think the fair way everyone thinks about it is probably direct lending to private companies. So, we’ll keep the discussion around that. So, the environment is there where non-bank lenders are able to provide support for these companies in a much more meaningful way than ever. For instance, just this year there was a loan package that went out, over $5 billion. So, that’s pretty amazing in terms of the size of an individual loan and just what that means for the marketplace. So, that’s non-banks going into where banks used to be. So, that’s the investment side of things.
On the investor side of things, tons of excitement and interest from all different types of investors, whether it be insurance companies, institutions and/or individual investors, just getting access to an asset class that doesn’t necessarily behave in the exact lockstep as the markets, that generally is variable rate oriented and produces a really significant yield. It’s a nice place to be from a portfolio management perspective.
Kali Jakobi Long:
That’s really interesting. Tell me more about what you are hearing from private debt clients about the challenges they face as they try to scale.
James Jefski:
That’s interesting and at the top of everyone’s minds, right? If you just think about the incredible growth in the industry, how do you deal with that? And the simple answer is I think everybody has a digestion problem right now. The growth and how do you handle it and the expected growth and how do you handle it?
It starts with people. It starts with human capital coming from a smallish industry to something that’s grown so fast, how do you have the amount of employees at a global perspective that are trained and have the ability to help across all aspects of processing private credit? And once you get past people, you think about technology and data and frankly, an industry that isn’t digitized to start, if I could use something in bunny quotes, I guess. How do you handle that from a data perspective and not have siloed data and think about things that are non-standardized and bringing them into a format so you can actually make decisions? So, everyone’s talking about both those two things and how they play together.
And I think the simple answer is you have to be conscious of both of those impediments to scale and actively move towards addressing them. So, what’s my training program? How am I thinking about people? How am I thinking about my global organization? How am I thinking about outsourcing, insourcing, et cetera? And let’s start today on the data problem. Let’s recognize that I probably have things in the past that could have been record-kept in a different way, but how do I start today and a way forward for all my technology and all my data?
Kali Jakobi Long:
I know some of those challenges are common across all of private markets. I definitely hear about data silos all day, but which challenges are really unique just to private credit?
James Jefski:
So, you’re right, I mean, there’s challenges that just face private markets in terms of the paper nature, I’ll say, of some of the process. However, some of the things that are private credit specific, I’d say start with a positive, which is it’s a really good asset class for a lot of different types of investors. So, it brings about complexity that perhaps isn’t there at such scale in some of the other private market asset classes. So, you have things like BDCs, SMAs, insurance-based platforms, private wealth-based platforms, registered wrappers, and the reporting needs and transparency needs of all those are slightly different. So, while it’s good that you actually have the ability to go across all those and put a product out there that fits it all, it creates a challenge at the same time because now you have different data requirements, different reporting requirements.
The other thing is private credit generates activity. So, it’s not something where you buy it and it sits there until quarter end and you value it, perhaps there’s a transaction along the way. You have daily activity in terms of accruals, cash reconciliation, changes in rates and amendments and so on and so forth. So, just the volume of activity is a little different and certainly more robust than you’d see in some of the other private market asset classes.
Kali Jakobi Long:
That makes sense. I know with increasing scrutiny from regulators, many private market managers are focused on valuations, how to track them accurately, report on them in a timely manner, all of that. How are your private debt clients grappling with this?
James Jefski:
Yeah. So, I’ll actually pull it back to something I just said about the different capital wrappers and investors that are interested in this. When you think across that spectrum, you might have an SMA, or separately managed account, to clear up the acronym. You might have an SMA that doesn’t necessarily have the same valuation requirements as a BDC or a interval fund. In some cases, those need to be daily valued and have activity versus something where you’re just keeping an investor up to date and maybe they don’t even want actual unrealized activity showing up on their account. They want to keep a standard or a flatter trajectory in terms of market value.
And so that being said, having the capability to bring a valuation process across all those and say, “What I do today is what I’m going to do tomorrow and I’m going to do the next day.” Having it repeatable and reasonable is really the words all of our clients talk about and how they track it. It’s more than just valuations by the way, on the regulation front. Transparency is a really hot topic. Reporting on things like expenses. Reporting on things like valuation and performance. I think all of us have been aware of the news on some of the new SEC reporting requirements and that’s a hot topic for everyone right now. And how can you handle that level of transparency all the way through your books and records to satisfy some of those requirements?
Kali Jakobi Long:
When it comes to the timely manner of things, you had already mentioned start with the data journey today, start with technology today. How does that actually play out? What does that look like for investors trying to implement technology as fast as possible?
James Jefski:
So, that’s a really good question. I think when we talk about starting today, you really need to think at the end of what’s my end result? What do I really want to get out of this? And who are the personas within my firm as well as externally who need access to that data? That’s a really key aspect to think about, because what it allows you to do is to say, someone who has an investor relations hat on versus a portfolio manager versus an accountant versus an investor versus an auditor versus a back office support team. They have different needs, timing and data requirements. And so if you don’t think about it from a persona base, I think you’re missing out and down the road you’ll end up with a, “Oh, jeepers, I wish I had that available for a woman sitting in this department or a man sitting in that department, or a AI tool that needs to be fed this data so it can do its job.”
And so, if you don’t think about those outcomes and the personas and needs first, it can lead you to some roadblocks or log jams. So, if you start with that and then you think about granular data as much more powerful than things that are netted out. So, where do you have opportunities to look at booking things at a granular level, tracking things at a granular level that are appropriate for, again, those individual personas, whether it be a tech persona or an individual person persona? Working backwards on that and tracking it in a granular fashion is really important, which doesn’t necessarily happen all the time today. It usually is people get a piece of work done and then get asked a question later and have to rework it to get the data in a way that’s more palatable for the individual constituent who’s picking up that data. So, trying to eliminate that is really important.
Kali Jakobi Long:
That’s awesome. I want to hear more about potential headwinds for private debt as we look to the future or what’s coming down for this asset class, what do you see coming down?
James Jefski:
Yeah, we already talked about the ability to scale quite a bit. Let’s just face it, that’s still real. That’s not going anywhere. We have to digest the workflow and capabilities associated with the growth. Anytime you talk about headwinds though, obviously the economic conditions, everyone has talked about that for a while now and depending on the conversation, talking about a recession or some default risk on deals and when is this market going to turn? And things like that. So, really thinking about that. And depending where you are in your thought process on how real you think that is, when those tides are going to turn, et cetera, as a debt investor, you’re thinking about risk first, usually ahead of returns. It’s a risk first mantra.
And so, having availability to track things like underlying covenants, track things like overarching refinancing rates. For a company that was able to borrow at a much lower rate not too long ago now has to run operations, borrowing money at a much higher rate. And is there a going concern there? Is that going to lead to trouble? Obviously, we have macroeconomic, macro conditions around the world that have occurred over the past couple years and continue to affect markets. How do you deal with whether it’s conflicts in Europe or the Gaza conflict or any of those things?
So, really having access to understanding your platform, understanding your data and layering in the risks that could occur, allow you to manage your portfolio and sleep at night in a much easier way than perhaps if you didn’t have access to that data or you didn’t have a good picture of what everything looked like.
And when we talk about that data, it comes down to really having a front to back capability. And I talked earlier about constituents or people who needed the data. That’s really the same data, by the way, I should have said that earlier. It’s all about, hey, if a person or a piece of technology knows the value to be 10, everyone in the firm, everyone who gets that data needs to know the value of 10 as soon as it’s established, needs to know the covenant, needs to know the cashflows, and it shouldn’t be a searching effort around the firm. It shouldn’t be VLOOKUP, pivot table, that sort of stuff that probably occurs now. And frankly, a lot of phone calls and emails, that happens now.
Having access to it so that the front office professionals can see as soon as a cashflow doesn’t come in, can call the company, “What’s going on here? Can we help?” Or vice versa, the back office knowing, “Hey, we talked to this company, we’re going to change the terms a little bit to allow them a little wiggle room.” This, that, the other thing. That’s important for everybody to have access to. So, really understanding the conditions of your portfolio, of your fund structure front to back is super important and the speed to market with effective decisions is a differentiator and will continue to be a differentiator in the future.
Kali Jakobi Long:
Thanks for that, James. As we start to wrap up our discussion today, what is the one thing that private credit managers need to take away from our discussion today?
James Jefski:
I think it’s really important to think about, number one, where are you right now in your journey? Know who you are as far as your investor base, your investments, your path to growth. And start planning, as I said, today, about how to get there from a people as well as a technology perspective. Those don’t happen overnight. It takes a little while. Right? You have to have a thought process on, “All right, here’s where I want my offices to be.” Talk about the return to office and all that kind of great stuff, but, “Here’s where I want my offices to be. Here’s the type of people I need and where I need them.” Combined with, “Here’s what I need them to have access to across my firm from that data perspective.”
So, really thinking, “How do I transform and create a much more homogenous workforce data layer continuum,” if you will, “across my organization that eliminates all the starts and stops that occur right now.” And I can tell you for sure, there are a lot of starts and stops that occur in the current workflow and some managers are really tackling that. Certainly at State Street, we’re looking to tackle that both internally as well as how we’re able to provide solutions for our clients.
And as I said earlier, starting today, just don’t wait on that. It takes a while to have a thoughtful process on running your platform, and then hit it hard. Once you decide those factors, hit it hard and go in and say, “We need to really talk about getting our arms around the data, around the workflow, around all the pieces associated with this.” And don’t allow legacy thoughts to creep in of, “It’s never been done that way before. We can’t do it that way.”
Kali Jakobi Long:
Yeah.
James Jefski:
Or, “Yeah, but this is a piece of paper. How am I supposed to fix that?” Really break through those barriers and don’t take those old-fashioned answers because you’ll never be able to scale and grow to the numbers that you spoke to earlier, Kali, with the industry if you’re thinking about it in a dated mindset.
Kali Jakobi Long:
That’s awesome, James. Thank you so much for an incredible discussion around private credit. And for our loyal listeners, you know that I can’t end a podcast without my personality question. So, James, your personality question today is as we have the holidays approaching us, I want to hear what your favorite holiday is and why. It doesn’t have to be any that are coming up. It could be any throughout the whole year or a personal one.
James Jefski:
It’s tough to not like holidays in general.
Kali Jakobi Long:
Yeah.
James Jefski:
And so, I’d say all of them, but I guess I’ll say two. One is certainly the Christmas holidays are important to me just for a couple of reasons. Number one is generally speaking, a number of people are able to take that time off and gather, whether it’s family and friends. So, it’s not a onesie, twosie. You’re able to spend some meaningful time around that time of year with people who you care about and are important in your life. So, I have to say Christmas.
But that being said, even though I’m from Boston, I’m not necessarily a winter guy and so, I do like the 4th of July because it comes at an amazing time in the summer and you’re able to do a bunch of summer activities with friends and family. So, I know you asked for one, but I’ll give you two.
Kali Jakobi Long:
I like it. I like you’re picking one in the summer and one in the winter. I love the holidays too. I’d have to say Christmas. All my family traditions and everything like that pretty much revolve around Christmas and I feel like everyone’s just a little bit nicer and a little bit more cheery. And I am in Florida, so I don’t get any snow. I love the snow, and so, I do appreciate a white Christmas when I can make it to an area that has that. So, there’s our personality question.
James, thank you for all of your insight on private credit. For any of our listeners that want to learn more or discuss with James further, you can reach out to me, Kali Jakobi Long, and I will get meetings set up for you guys. So, thanks everyone for tuning in and listening. And James, thanks the most to you for being our guest today.
James Jefski:
Yeah. Thank you, Kali, and thank you to the listeners. Look forward to any follow-up questions.
Kali Jakobi Long:
Thanks for listening to this episode of Data Disruption by Charles River. If you like what you heard, share and leave us a review. It helps others to discover the show and I thank you for it. And if you’d like additional insights related to this conversation or others, go to our website at www.crd.com. Until next time.
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The material discussed is for informational purposes only. The views expressed in this material are the views of the author and are subject to change based on market and other conditions and factors, moreover, they do not necessarily represent the official views of Mercatus and/or State Street Corporation and its affiliates.