Effective Private Credit Pipeline and Deal Management

Harnessing the right processes, partners and platforms to ensure success

In our recent article, we discussed the rapidly changing private credit landscape and potential opportunities facing investors as they seek to enter or expand exposure to this dynamic asset class.

This week, we explore why effective deal and pipeline management can help investors make better informed investment and risk management decisions, and the foundational role of technology platforms and partners in accelerating alts managers’ growth agendas.

CROWDED DEALS, DIMINISHING QUALITY

Quality deals in private credit are increasingly hard to find, impacted by robust fund flows chasing a finite number of opportunities. Fierce competition for the best deals leaves smaller firms shut out or undersubscribed. Unlike traditional bank loans, private credit investments are typically riskier, extending credit to companies that struggle to secure funding on better terms and at lower rates.

Increased use of “covenant-lite” loans means there are fewer restrictions on borrowers resulting in fewer protections for lenders. As private entities, changes in credit quality or leverage are often not communicated to investors on a timely basis, making it harder for creditors to control struggling companies and shield their investments from loss.

The emergence of recurring revenue-based loans is also raising concerns.  This form of debt financing focuses on how much revenue a company generates regardless of profitability, which often extends the life of non-viable business models that can saddle investors with losses.

It’s no surprise that private credit grew rapidly during a decade of near-zero interest rates, offering investors superior returns compared to sovereign debt. During periods of rising interest rates, borrowing becomes more expensive and default risk increases. Deals that were nominally profitable in a low-interest rate regime are suddenly underwater with even a modest rise in rates. Since the 2022 rate hikes, it’s become more challenging than ever for investors to identify promising deals that align with their risk tolerance and expected returns.

Adding to this volatile landscape, private credit markets are not centrally regulated, so without a standardized process or mandated disclosure requirements, investors are on their own when it comes to assessing a borrower’s credibility.

It’s no surprise that private credit grew rapidly during a decade of near-zero interest rates, offering investors superior returns compared to sovereign debt.

PIPELINE AND DEAL MANAGEMENT CHALLENGES

Against this backdrop, it’s critical for fund managers to have the right process, people and technology in place to enable robust and scalable deal and pipeline management. Both incumbent pureplay private credit managers as well as new entrants can benefit from partnering with a trusted global service and technology partner.

Private credit investors require significant agility and analytical expertise to source and identify the most promising opportunities, at a pace that would have seemed impossible a few years ago. A streamlined process for vetting and analyzing potential deals is increasingly needed to support funds looking to grow their portfolios.

Given the information asymmetry between lenders and borrowers, due diligence is increasingly challenging and expensive.  Further, investors have limited time to conduct detailed financial, legal, and operational assessments.

Private investments are characterized by uncertain revenue projections, evolving business models, and lack of comparable data. Investors need to subject their portfolios to periodic stress testing incorporating thousands of potential economic scenarios and financial assumptions to ensure their ability to withstand periods of market and economic turbulence

Deal execution and closing is documentation intensive, with paper-to-digital logjams, versioning issues and email latency all conspiring to delay closing dates. Responding to legal and regulatory requests means Investors must navigate compliance requirements, tax implications, and jurisdictional differences, especially in cross-border deals.

Maximizing deal profitability also requires accurate and timely cash flow forecasts to ensure capital is deployed strategically without overcommitting or underutilizing investor funds. Pipeline management platforms track and manage financial statements, covenants, due dates and other critical metrics.

A streamlined process for vetting and analyzing potential deals is increasingly needed to support funds looking to grow their portfolios.

ENABLING GROWTH WITH AUTOMATION, INTEROPERABILITY AND STANDARDIZATION

As portfolio size and complexity increases, investors are reexamining their operating models, seeking scale, enhanced governance and transparency, and optimization around core activities vs supporting functions.  A key component of this is the technology stack that supports processes and makes data available to decision-makers.  Critically, technology  platforms automate low value, repetitive tasks and provide robust interoperability with data providers and other systems. This also reduces operational risk by eliminating manual, error prone activities.

Modern, interoperable technology in turn supports standardized workflows and processes to help firms operate at scale, enabling vetting of significantly more opportunities without adding analysts. Spotting opportunities early in an increasingly crowded field is key. Technology that helps identify patterns across companies, industries, and sectors can help firms stay ahead of peers competing for those same deals. While many investors still rely on manual processes, spreadsheets, and disparate tools instead of integrated CRM and deal management software, industry leaders are harnessing the transformational power of automation, interoperability and standardization to enable their growth agenda.

Industry leaders are harnessing the transformational power of automation, interoperability and standardization to enable their growth agenda.

THE ROAD AHEAD

Capital markets are intensely competitive, with industry leaders actively exploring and adopting the latest technology to increase productivity, identify new investment opportunities and monitor risk exposures across their portfolios.

AI offers the potential to transform private credit, with new tools for deal sourcing, risk assessment, and decision-making. Although AI holds significant promise with the potential to boost analyst productivity and speed time to insight, it also poses new challenges.

Given the rapidly changing private credit landscape, investors need the right processes, expertise and technology to onboard new opportunities and help mitigate the attendant risks associated with this rapidly growing asset class.