Private Debt Archives

Private debt has become one of the fastest-growing segments of the alternative investment landscape. Once considered a very niche strategy, it has slowly gained mainstream acceptance, particularly among institutional and other sophisticated investors seeking higher yields and greater control over risk compared to traditional debt markets and other alternative asset classes, like private equity or venture capital.

The increased appetite and acceptance has led to a spike in private debt finds launched.

In this guide, we’ll tell you everything you need to know about private debt funds including how they operate, how they are structured, and some of the key strategies they employ to manage risk and generate value for investors.

What is a private debt fund?

Private debt, also known as private credit, refers to the provision of debt financing to borrowers through channels other than traditional banking institutions or public markets. So rather than securing loans from banks or issuing publicly-traded bonds, businesses borrow the funds needed to support growth, refinance existing debt or fund acquisitions and current operations from private lenders. Understanding the differences between private credit vs. public credit is essential to grasp how this asset class fits into a diversified investment strategy.

One of the primary sources of this type of lending is private debt funds. These are pooled investment vehicles that gather capital from a range of investors, including institutional investors (such as pension funds, insurance companies, and endowments) and high-net-worth individuals. The fund then strategically deploys this pooled capital to provide diverse forms of debt financing to companies.

Unlike public credit investment vehicles, which are traded on open markets, private debt is privately negotiated between the lender (the private debt fund) and the borrower (the company). This allows the lender and borrower to tailor the terms of the loan or debt facility to the specific needs of both parties.

Returns for investors in private debt funds primarily come from interest payments on the fund’s portfolio of loans. The rates charged depend on factors such as the borrower’s creditworthiness, the type of debt issued, and the prevailing market conditions.

But generally, the illiquid nature of private debt and the fact that they are typically extended to borrowers with more complex financing needs, such as middle-market companies or those lacking access to conventional financing, means they typically command higher rates to compensate for the higher risk and/or custom terms.

What’s more, most private debt also comes with a floating rate that’s pegged to a base rate, such as the Secured Overnight Financing Rate (SOFR), which offers investors potential protection against rising interest rates.

Why have private debt funds become popular?

Private debt funds rose to prominence following the 2008 global financial crisis. As banks came under tighter regulatory scrutiny and adopted more conservative lending practices, a financing gap emerged, particularly for middle-market firms and other businesses with riskier credit profiles.

Private debt funds stepped in to fill this void, positioning themselves as a vital alternative to traditional lending.

In the years following the financial crisis, persistently low interest rates (that meant low yields on traditional bonds and savings products) further pushed investors towards private debt as an alternative.

The end result has been exponential growth in this sector. Private debt assets under management have surged from just over $300 billion in 2010 to over $1.8 trillion currently. According to Preqin, this figure is projected to reach $2.64 trillion by 2029.

Benefits of private debt

Let’s look at some of the primary benefits of private debt for investors.

Potential for enhanced returns: Private debt often offers the potential for higher risk-adjusted returns compared to traditional fixed-income investments. This is largely due to what’s known as the illiquidity premium, which is the additional return investors demand and receive for holding assets that cannot be easily sold or traded in the short term. Since private debt investments are typically long-term and not publicly traded, investors are compensated with higher yields.
Diversification benefits: Private debt offers portfolio diversification by providing access to an asset class that tends to behave differently from publicly traded investments. They can act as a stabilizing force against market volatility in a broader investment portfolio.
Customization and risk control: Managers of private debt funds possess greater control over the terms of the loans they originate. This enhanced control allows them to better manage credit risk and tailor each investment to specifically meet the fund’s desired risk-return profile.

Types of private debt funds

Private debt funds come in various forms. Let’s look at the most common types.

Direct lending funds

Direct lending is the most common form of private debt, accounting for about 44% of overall assets under management (AUM). It involves providing loans directly to middle-market companies. These loans usually take the form of senior secured debt, meaning they are backed by the borrower’s assets and have priority in repayment if default occurs. However, they can also take other forms, such as unitranche loans (combining senior and subordinated debt).

Distressed debt funds

These funds invest in the debts of companies facing financial difficulties. The objective here is to purchase debt at a discount, with the potential to realize significant gains if the company’s fortunes improve or through restructuring initiatives.

Mezzanine debt funds

Mezzanine debt is a hybrid form of financing that offers both debt and equity-like features (e.g., equity warrants or conversion rights). In the capital structure, it sits between senior debt and equity and therefore carries higher risk. Accordingly, mezzanine debt offers higher returns to compensate for this increased risk.

This type of debt is commonly used in leveraged buyouts and other acquisition financing. For corporate borrowers, mezzanine debt is attractive because it provides growth capital without diluting ownership significantly or imposing the restrictive covenants of senior loans.

Special situations

Special situations investing involves deploying debt capital in companies undergoing unusual or complex events that create opportunities for value realization. These events might include restructurings, asset sales, spin-offs, regulatory changes, or shareholder activism. Unlike distressed debt, which deals with troubled companies, special situations may involve fundamentally sound businesses facing temporary disruptions or strategic shifts.

The goal is to capitalize on the inefficiencies caused by these unique circumstances and profit when things settle down. The approach is highly opportunistic and requires deep due diligence and a hands-on style. However, the returns for special situations debt funds can be high due to limited competition and borrower urgency.

How private debt funds are structured and managed

Private debt funds are often set up as limited partnerships comprising two main stakeholders.

Limited Partners (LPs)

These are investors committing capital to the fund. As mentioned, they include institutional investors, like pension funds, insurance companies, and endowments, and high-net-worth individuals. LPs have limited liability, meaning their potential losses are typically capped at their investment amount.

General Partner (GP)

They are the fund managers. They are responsible for setting the fund’s strategic direction and overseeing its day-to-day operations, including sourcing deals, conducting due diligence, managing the portfolio, and ultimately exiting investments. The GPs have unlimited liability.

The relationship between LPs and the GPs is governed by a detailed Limited Partnership Agreement (LPA), which defines the investment strategy of the firm, the fee structure, and other important terms.

Besides the GPs and the LPs, there are several other players in a private debt fund who also play an important role. These include analysts and specialists who provide crucial support to the fund managers in evaluating and managing investments.

How private debt funds work

The investment process of a private debt fund involves the following steps.

Identifying investment opportunities

The first step in a private debt fund’s operation is sourcing deals, i.e., seeking potential entities needing private debt financing. This typically involves leveraging established relationships and networks with intermediaries such as investment banks, private equity funds, financial advisers, and business owners. In some cases, corporate borrowers may bring potential debt financing opportunities directly to the private debt fund.

Initial deal screening

Once a deal is identified, it undergoes initial screening to determine whether it fits the fund’s strategy and risk profile. At this stage, the investment team assesses the loan amount, purpose, borrower type, and broad financial metrics. Deals that don’t meet the basic criteria are quickly filtered out to focus resources on stronger candidates.

Creditworthiness assessment (risk & return evaluation)

This is one of the most critical steps in the process. The fund conducts a detailed evaluation of the borrower’s financial health, business model, and industry position. Key metrics such as cash flow stability, leverage, and collateral coverage are analyzed to understand the risk of default and the potential return.

This phase may also include scenario testing to assess how the borrower would perform under various stress conditions. The overarching goal here is to evaluate the risk-return tradeoff and determine whether the loan offers sufficient return relative to the risks involved.

Due diligence

If the borrower clears the credit assessment, the fund moves into due diligence. This involves validating the borrower’s financials, reviewing legal documentation, and evaluating any operational risks. The team may conduct site visits, consult external advisors, and review contracts or litigation history to ensure there are no hidden red flags.

Deal structuring

Once due diligence is complete, the next step is structuring the deal. This includes setting the interest rate, repayment schedule, financial covenants, and collateral requirements.

Investment committee approval

The proposed deal is then presented to the investment committee for final approval. The committee reviews the investment thesis, risk profile, and return expectations. If approved, the fund proceeds to legal execution and funding.

Execution and funding

Legal documents are finalized, and the capital is disbursed according to the agreed terms. The fund ensures the borrower complies with initial conditions and that all security interests are properly registered.

Ongoing monitoring

Post-investment, the fund closely monitors the borrower’s financial health and compliance with loan terms. This includes tracking timely interest payments, reviewing financial statements, and checking adherence to covenants. Missed or delayed interest payments can be an early signal of distress, prompting the fund to intervene or renegotiate terms. Active monitoring helps safeguard returns and ensures the portfolio remains on track.

These loan monitoring and administrative tasks are often referred to as middle office operations, and tend to be time-consuming, involved workflows that require in-depth knowledge of bespoke credit vehicles. Due to this, many private debt managers choose to outsource some or all of their middle office credit operations . Alter Domus offers services for any loan or fund operations task from such as loan agency or loan administration.

Key investment strategies for private debt funds

Private debt funds use several investment strategies to achieve their core objectives of generating consistent income, preserving capital, and delivering strong risk-adjusted returns for investors. Let’s break down the most notable strategies.

Sector-focused investing

Many private debt funds are increasingly adopting a sector-focused approach. Some sectors that are popular with private debt funds include real estate, technology, infrastructure, healthcare, and industrials. Focusing on specific sectors allows fund managers to build deep industry knowledge, build valuable networks, and better assess the risks and opportunities associated with potential borrowers.

Covenants and protections

Private debt funds often incorporate specific covenants in loan agreements. These covenants are designed to protect the lender’s investment and provide early warning signs if the borrower’s financial health begins to deteriorate. The two main types of covenants are:

Financial covenants: These, for example, may require borrowers to maintain certain leverage ratios or liquidity levels.
Operational covenants: These may include restrictions on asset sales, additional debt, or other business activities that could increase risk.

Diversification

Diversification is another key strategy that many funds use to achieve their objectives. Rather than concentrating capital in a few large positions, fund managers typically spread investments across multiple borrowers, industries, and geographies.

This approach limits the fund’s exposure to any single point of failure, be it a borrower default or regional economic shock.

Importantly, sector focus, which we looked at earlier, and diversification are not mutually exclusive. A fund may specialize in a few core sectors while still diversifying across different borrowers, deal sizes, geographies, and loan types. For example, a fund focused on infrastructure might diversify by investing in different sub-sectors (e.g., energy, transportation, and utilities) or by combining senior debt, subordinated debt, and unitranche structures.

The result of diversification is a more resilient portfolio; that is, one that’s better equipped to withstand cyclical shifts while delivering consistent, risk-adjusted returns over time.

Common questions about private debt funds

How liquid are private debt funds?

Unlike publicly traded stocks or bonds that can be bought and sold relatively easily on exchanges, private debt investments are generally considered illiquid. This means that it can be challenging for investors to sell their fund interests or the underlying debt holdings quickly and at a fair market price. In fact, most private debt funds are structured as closed-end funds with multi-year lock-up periods, typically ranging from five to ten years.

The illiquid nature of private debt is not inherently negative, however, as we’ve already seen. It’s often compensated by higher yields. But it does mean investors should carefully consider their own liquidity needs and investment horizon before committing capital.

Generally, private debt funds may be more suitable for investors with a long-term perspective, i.e., who do not require immediate access to their capital and are comfortable with it being committed for an extended period.

What are the fees and costs associated with private debt funds?

Like many other actively managed investment vehicles, private debt funds charge management and performance fees.

A typical structure includes a management fee of around 1% to 2% of committed capital, which covers operational and administrative costs. In addition, fund managers may earn a performance fee (or “carried interest”), of around 10% to 20% of profits, once a hurdle return is met, often in the range of 6% to 8%.

If there are any other fees or charges, they will be outlined in the fund’s LPA.

Final thoughts: Understanding private debt funds

Private debt funds have become a key part of the alternative investment space. Their appeal to investors stems from the potential for strong risk-adjusted returns, greater control over deal terms, and a low correlation to public market movements.

However, understanding the structure, operations, and strategies behind private debt funds is crucial for making informed investment decisions.

Overall, private debt can be a compelling option and a valuable addition to an investor’s portfolio, provided they are comfortable with longer investment horizons and limited liquidity.

For fund managers, success in the private debt market depends on not just being able to source quality deals but also having a strong operational backbone. Alter Domuscan help with the latter. We provide custom private debt solutions that streamline fund management, optimize operational efficiency, and support fund managers in navigating the complexities of the private credit markets.

Reach out today to learn more about how Alter Domus can support your private debt strategy.

Data reflected in eyeglasses, symbolizing analysis and expertise in fund administration services.

Portfolio optimization is a cornerstone of modern asset management, aiming to balance risk/return, promote portfolio diversification, and improve overall portfolio efficiency.

Fixed income managers actively seek to optimize their portfolio allocations such that the portfolio is expected to generate the maximum return with the least amount of risk. In this context, managers may apply an internal scoring methodology to grade assets as part of their investment decisions. These scoring methods in many cases rely on a weighted approach based on certain factors, many of which may be subjective. In addition, managers may rely significantly on a single guiding metric, such as yield, but still need to further control for other factors, such as credit risk, to be comparable.

Investment decisions are further complicated by various constraints. Constraints may be market driven, such as the availability of investments or market prices. Investor-mandated factors such as average credit quality, percentage limitations and duration may also come into play, as do regulatory factors, such as SEC, NAIC, Federal Reserve, Basel III rules.

These constraints can apply across all areas in fixed income, whether the asset is an investment grade credit, a high-yield bond, a broadly syndicated loan, private debt or structured credit. Constraints could also extend to other ‘cash flow intensive’ investments, such as commercial real estate and infrastructure.

Given the myriad factors that investors must consider, it comes as no surprise that portfolio optimization in fixed income is a sophisticated process with complex methods and techniques.

In this paper we present a framework designed to address these complex portfolio allocation challenges. This framework offers a single universal metric, the Alter Domus Score (‘ADS’), which can arm managers with a solution for efficiently measuring an optimal portfolio allocation that is objective and comparable across any fixed income investment.

The ADS, which is an asset-based measure, is also robust and controls for information relevant to any fixed income investment – including those tied to asset based loans – ranging from cashflow characteristics and credit worthiness to market price, pre-payment, and illiquidity costs.

We will detail the elements of the ADS, including the underlying framework, and illustrate the relationship between the ADS and changes to certain key asset-based characteristics.

Why Trade Optimization?

Trade optimization addresses a fundamental economic problem: maximizing the efficient and productive use of limited resources, specifically investable capital. Fixed income managers must, therefore, choose from among various investment opportunities to maximize the overall portfolio return given each investment’s attributes, which include cashflows, credit risk, and market price.

In most cases, managers are also faced with a variety of constraints, such as credit quality, maturity, and diversification limits, to name but a few, which adds more complexity to their decision-making process.

Essentially, managers aim to navigate these variables to deliver the best value for their investments.

The ADS presents a framework that relies on a single metric and objectively accounts for economic factors that are key to any fixed income investment. This framework is particularly valuable for managers bound by constraints, helping them to make the best investment allocations when weighing tradeoffs. The ADS serves as a complement and support to existing methods used by investment managers.

The ADS: an objective and universal measure for trade optimization

The ADS is an objective measure that is rooted in fixed income theory.

Essentially, it represents the discounted and risk-adjusted cashflows for any expected stream of cash flows, including fixed income instruments, such as bonds, loans, and asset-backed securities (ABS).

The ADS is easily comparable across all securities since it is a measure based on a single dollar (or any currency) value at risk. This feature allows any prospective universe of fixed income investments to be rank ordered on a pro-forma basis to determine an optimal portfolio allocation that is subject to constraints.

The score means that a fixed income investor can compare a bond to a loan or an ABS security – or even a real estate investment – when selecting the optimal portfolio allocation investment decision.

The score is agnostic as to the type of underlying investment and relies on the individual cashflow characteristics of the asset, factoring in the time value of the expected cash flow and uncertainties due primarily to the credit risk of the borrower and potential prepayments.

Digging into the detail: the formula behind the ADS

The ADS is calculated based on the following formula (see Appendix for detailed description of inputs).

To make effective comparisons across assets, the outstanding principal balance of the asset is first normalized to an indexed value of 1, which results in the market value (MV) to be a percentage of the indexed value. Therefore, we can break down the key inputs into two groups – one group is based on asset-specific attributes and the other reflects cashflow uncertainties.

To present it simply, the numerator represents the present value of the risk-adjusted weighted cashflows over the duration of the asset, the Cashflows Risk-Adjusted Value (C-RAV) while the denominator is the MV[1].

Some key factors to consider are that the risk related inputs can be based on the manager’s judgement or can be used to gather insight as to what the market value implies.

The ADS can also be used to generate trade ideas for making asset substitutions, when, for example, seeking a better relative-value opportunity, and thus can increase the likelihood that a portfolio will be better off or more optimal.

Applying the ADS in different scenarios

It is noteworthy to begin highlighting three possible scenarios of the ADS for any given security.

ADS > 1 (i.e., C-RAV > MV),
ADS < 1 (i.e., C-RAV < MV), and
ADS = 1 (i.e., C-RAV = MV).

Example 1: In cases where the ADS score is greater than 1, the time-value adjusted and risk-adjusted cashflows based on the manager’s expectations is greater than what the market price is reflecting. The asset is therefore ‘undervalued’, as indicated by the asset’s risk/return profile.

These are assets that offer the manager favorable investment characteristics, as the value of the risk-adjusted cash flows is greater than the price to acquire those cash flows.

Example 2: In cases where the ADS is less than 1, the time-value adjusted and risk-adjusted cashflows based on the manager’s expectations is less than what the market price is reflecting. The asset is thus ‘overvalued’, as indicated by the asset’s risk/return profile.

The manager will seek to sell these assets since the proceeds from those sales would exceed the manager’s fundamental assessment of what those cash flows are worth.

Example 3: In cases where the ADS score is equal to 1, the time-value adjusted and risk-adjusted cashflows based on the manager’s expectations is equal to what the market price is reflecting. So, the asset is ‘fairly valued’, as indicated by the asset’s risk/return profile. These assets have market values consistent with the manager’s fundamental assessment, and the manager would therefore be indifferent to holding, buying, or selling these assets.

When working through these scenarios, it becomes clear that a manager can begin to utilize the ADS as a metric for comparing and effectively rank-ordering decisions across different types of fixed income assets.

The ADS can also be used as a tool to inform the manager as to what the risk-based inputs the market is implying. With these inputs on hand, the manager can better assess whether an asset’s market price is rich or cheap.

Manager judgement, of course, is an important element to calculating the ADS.

The ADS could be pre-populated with apparently objective inputs and additional manager overlay could significantly improve the quality of the ADS and its utility as a tool to support portfolio optimization.

Assessment of prepayment rates and credit risk inputs are informed by asset manager expertise and play a big role in calculating the ADS.

Dissecting the AD-Score

The tables below illustrate the relationship between the ADS and changes to certain key inputs holding all else equal. We have intentionally kept the analysis simple so that we could better illustrate the mechanics behind the score.

A more thorough analysis, inclusive of actual cash flow payment dates (we assume annual for our simple analysis), spot risk-free rates (we assume a flat risk-free curve), more dynamic prepayment rates, and other more precise inputs are considered as part of the ADS.

For simplicity we also assume the assets are floating rate senior secured loans, but set at a fixed rate, and have a narrow band of possible recovery rates. The probabilities of default (PDs) are based on the Moody’s idealized default rate table.

The Tables that follow illustrate how the ADS score may shift under different scenarios:

Table 1: Impact of Coupon Rates and Credit Risk Ratings to the ADS

The first part of the analysis (see Table 1) shows the calculated ADS for a group of six stylized loans. The loan coupons range between 5.50%-10.75% (4.50% risk-free rate and risk premiums between 1.00%-6.25%) and have current ratings in the Ba2-Caa1 range. The loans have six-year stated maturities (with 10% constant prepayment rate – CAP) and assumed recovery rates of 45%. Note that for further simplicity we assume the current market values are 100% (or equal to par), and that the stated coupons are such that the current ADS is 1.00 (or ‘fairly valued’ at par).

Table 1 also shows a range of possible ADS scores based on changes to credit risk ratings and coupons. It can also be viewed as changes in the manager’s opinion of credit risk (or PD) associated with the loan. Furthermore, the ADS values can reflect the manager’s opinion on its own fundamental assessment of the loan cashflows (or C-RAV), holding all else constant.

In other words, these ADS values can reflect the manager’s opinion on what the fair value (or price) should be as a percent of par and can be used to compare to what the market price is offering.

Table 1: Impact of Coupon Rates and Credit Risk Ratings to the ADS

Initial noteworthy observations show that investors require compensation via higher coupons that are commensurate with lower rated loans, holding all else equal, such as a larger risk premium for riskier loans.

This can be reflected in the highlighted cells across the loans where the market price clears at par (also reflected with an ADS of 1.00). Notice that for each loan, a change to rating (or PD) impacts the ADS through C-RAV.

For example, if the stylized loan rated B2 were to be upgraded (or downgraded) by +/- 1 subcategory, the ADS value would change from 1.00 to 1.03 (and 0.96) respectively, assuming the market value of the loan remains pegged to 100%.

Table 2: Impact of Prepayment Rates to the ADS

Table 2 displays ADS values after reducing and increasing the CAP rate from 10% to 0% and 20%, respectively.

This scenario, of increasing prepayment rates, effectively reduces the asset’s weighted average life expectation, thereby reducing overall coupon cashflows, while also reducing the exposed amount to default, or in other words, prepayments are not subject to loss.

We first notice that those loans with lower ratings (and higher coupons) appear to be the most sensitive to CAP. A lower CAP rate scenario seems to generate more than enough coupon cashflows to compensate for the longer period of exposure to default, such as relatively higher C-RAV and ADS.

In contrast, the higher CAP rate scenario appears to reduce the coupon cashflows enough to lower the ADS (and C-RAV).

Keep in mind that this is an isolated scenario analysis meant for comparison. The outcome can be sensitive to other variable inputs, such as the default timing profile.

Table 3: Impact of Maturity to the ADS

Table 3 displays ADS values after reducing the stated maturity of the loans from 6 years to 5 and 4 years, respectively.

The stated maturity scenario analysis above shows that it has a similar effect to increasing the CAP rate (see Table 2) thereby drawing a similar conclusion.

Table 4: Impact of Recovery Rate to the ADS

Table 4 displays the sensitivity of ADS values at various recovery rates – from 40% to 50%.

This scenario analysis impacts the ADS through the loss given default (LGD) expectation of the asset. The table results are clear and intuitive in demonstrating that as recovery rates increase (or, as LGD decreases), the ADS naturally increases.

The extent of the increase appears to be in the range of 1-3 points of incremental ADS as recovery rates increase by 10% (from 40% to 50%). The larger ADS impacts are reserved for the lower-rated, or riskier, assets since the benefit of the higher recovery rates is most pronounced when the probability of default is relatively high.

A tool to navigate the complexities of fixed income portfolio allocation

Fixed income portfolio managers seek to optimize their portfolios to achieve the maximum return with the least amount of risk. However, they face numerous challenges, including market-constraints, investor/lender mandates, and potential regulation.

As managers strive to optimize their portfolios, they often utilize a scoring approach for generating trade ideas. In this paper we presented a framework that can support decision-making for these types of complex portfolio allocation challenges and complement frameworks that may already be in place.

The framework provides a universal score, the ADS, that is easily comparable across all cash-generating assets. The ADS is also simple, robust and controls for critical information, whether it is objective or subjective, relevant to any fixed income investment.

For AD clients, including clients of Solvas and Enterprise Credit & Risk Analytics, the ADS is offered as an additional measure to support our clients with their trade optimization, portfolio allocation, and risk analytics.

Please contact [email protected] for further information on how to access the ADS.

Appendix: Calculation of the Alter Domus Score

The first step to compute the Alter Domus Score (ADS) for any fixed income instrument is to normalize the initial face amount to a value of 1 in the relevant currency. The ADS is then calculated as follows:

Where:

[1] The MV can be adjusted in cases where the manager is subject to certain trading criteria. For example, CLOs commonly carry any loan that was purchased below a certain threshold (or ‘deep-discount’) at the purchase price, which results in a haircut to par in the OC tests. The ADS would effectively be capped (potentially at 1) in this instance.

Close-up of hand with pencil analyzing data, reflecting trends and insights in the private debt outlook.

Exploring private debt trends in 2025

Private debt is in line for a bumper year of deal flow in 2025 as M&A activity rebounds
Interest rate cuts will squeeze returns a little, but the asset class will continue to present compelling risk-adjusted investment opportunities
Private credit defaults are likely to track higher, but within manageable levels for managers equipped to troubleshoot
Competition for deals will intensify as broadly syndicated loan (BSL) markets continue to rally. Securities offered in this space are also predicted to evolve with trends, further enhancing attractiveness to investors. Debt funds must adapt pricing while leveraging securities to maintain competitiveness in core sectors.

Private debt’s so called “golden age” will still have room to run in 2025, even as interest rates come down and broadly syndicated loan (BSL) markets reopen. The financial landscape is evolving, bringing new views and strategies into private debt.

The asset class has proven resilience through rising inflation, benefiting from market shifts and proving reliable returns. With its floating rate structures benefitting from rising base rates at the same time as risk-averse BSL markets pulled up the shutters, opening the way for private debt managers to gain market share and take their pick from the best credits on offer.

These favorable dynamics have shifted in 2024, with central banks cutting rates as inflation subsided and BSL markets bouncing back to record double-digit gains in year-on-year issuance. Lenders will continue to provide diversified financing solutions to support various sectors.

Private debt managers will face increasing competition from global banking institutions and investors in 2025, impacting future financing. BSL markets in 2025 as a result, with BSL arrangers and investors showing strong appetite to lean back into M&A and leveraged buyout financings after a stepping back through the period of interest rate dislocation.

The last year has already seen BSL markets claim back market share, offering lower pricing to win back credits that were financed with private debt-backed unitranche loans.

Data from Bank of America and information from Bloomberg show that at least US$30 billion worth of private debt deals in the US were refinanced in the BSL market in 2024 at lower rates. BSL market participants will remain competitive, not solely based on pricing, but through strategic asset management. Arrangers, noting the speed of execution and certainty offered by private debt providers, have worked hard to get BSL pricing spot on to avoid flex and mitigate syndication risk.

For deep dives into key trends driving the 2025 private debt outlook, read on. Insights into how institutional investors view private debt’s role will be shared.

Pricing pressure for private debt investment targets

Banks and other financial institutions are reshaping their service profiles to adapt to these changes. Increased competition will keep private debt managers on their toes, but the asset class is still well placed for a strong year of activity and opportunity in 2025.

Managers will have to acknowledge the need to reduce margins to stay within a reasonable range of the pricing banks and BSL markets can offer in the year ahead. Many have already done so.

But while margins may have to come down, and interest rates are lower, private debt managers will still be able to deliver consistent, high single digit returns, as base rates remain well above levels from 24 months ago. On a risk-adjusted basis, private debt will continue to appeal to investors, even if returns are slightly lower than those delivered in 2024. Significant asset growth is anticipated across the private credit sector. Global trends indicate increased private market activities, including corporate financing.

Lower returns, however, will be more than made up for if a much-anticipated uptick in M&A activity is realized in 2025. Interest rate stability and the urgent requirement for private equity dealmakers to make distributions to LPs promises to deliver a meaningful uptick in deal volume and demand for private debt financing. With emerging corporate partnerships, private debt providers are poised to capitalize on substantial investment opportunities, also supported by significant asset allocations.

Private debt players have demonstrated the capability to finance significant credits during the period of interest rate rises. BSL markets may be open again, but private debt managers now have a track record of clubbing together to deliver financing for massive credits that not too long ago would have been the exclusive preserve of BSL markets. This showcases the increasing access to diverse private credit options that accommodate less traditional financing preferences.

Recently, for example, a club private credit managers teamed up to provide a £1.7 billion loan to help finance the take private of UK investment platform Hargreaves Lansdown. Private equity firms are exploring additional private market ventures, including direct lending strategies to leverage growth. While BSL markets will appeal to borrowers with lower pricing in 2025, but large credits will no longer default to BSL markets, as private debt managers show that they have the scale and appetite to offer flexibility and certainty of execution on big credits.

Dealing with private debt defaults

Strategic partnerships will be vital for managing private debt portfolios effectively, including asset risk considerations. A rise in deal financings, however, will not be the only thing taking up private debt manager time in 2025. Portfolio management will remain a key priority, as managers move to protect value and limit losses.

Private debt portfolios have proven resilient through a period of rising rates, and while defaults are expected to increase in 2025 as the impact of rising rates trickles down to borrower balance sheets, overall default levels should, all being well, remain within manageable thresholds.

Asset management strategies will need to adjust to address defaults. An uptick in defaults, however, will see a bifurcation in the market between managers with the capability and resources to steward credits through periods of stress and distress, and those that have strong transactional capabilities but haven’t made the investment in restructuring capability. This will become especially apparent in a market where defaults track higher at the same time as new financing deal volumes start to rally. Managers with lean teams will find it increasingly difficult to keep on top of new opportunities and keep troubled credits on track.

Regulatory changes influencing private debt

The evolving regulatory environment in 2025 is reshaping how companies value private debt. Emphasis on transparency ensures valuations precisely reflect the market conditions. This heightened scrutiny requires comprehensive and meticulous financial reporting.

Independent evaluations and transparent financial information will ensure asset values align with actual market conditions. Private credit managers must comprehend and strategize around regulatory shifts to manage obstacles. Emphasizing regulation can foster improved business practices among private credit managers, thereby offering clients more secure and stable investment options in a dynamic market landscape that features stringent regulatory standards from both global and regional authorities.

Leveraging global trends to expand in private credit

Banks are also participating more actively, providing complementary services to bolster private credit growth. Private credit is increasingly global, with heightened investor access to cross-border investment opportunities. The allure of high yields and diversification benefits is attracting global investors, making private credit a key strategy for asset managers aiming to harness international opportunities while managing financial risks. As global demand for securities evolves, embracing trends will be vital to stay competitive.

A good time to be in private debt

The next year might not be quite as good for private ~~credit~~ debt as 2023 and 2024, but the asset class is still set for a good 2025.

Winning deals will take more work as competition increases, and margins and returns will have to be adjusted accordingly for private debt to remain competitive in a market where other financing channels are beginning to function normally once again.

There will, however, be more deals to go for if M&A activity rebounds as expected, which should balance out the challenges posed by rising competition and tighter margins and returns.

The private debt “golden era” may have run its course, but private debt is an asset class that looks likely to retain is luster for some time yet.

Interview

How important is a manager’s operating model to its fundraising success in today’s market? To what extent has this changed and why?

Private markets assets under management have more than trebled to $14.5 trillion over the past decade, according to analysis by Bain & Co. In a climate of increased competition, LPs are placing a growing emphasis on private markets firms’ operating models.

This is in part because LPs have substantially larger pools of capital invested in private markets today. As a result of these larger exposures, they are leaning towards managers with robust operating models in order to limit the downside risk.

At the same time, managers with best-in-class operating infrastructure are better positioned to collect, analyze and harness data to improve deal origination, execution and portfolio company performance. Of course, dealmaking will always remain the core priority for managers, but GPs have come to realize that back-office capabilities and operating models can contribute to front-office success and play an important role in supporting future fundraising.

What areas are LPs scrutinizing in particular? What are the must haves and the red flags for investors doing their due diligence on operating models prior to committing to a fund?

Investors are certainly demanding more when it comes to reporting, compliance and technology. Having the right bespoke operating model in place puts GPs in a better position to differentiate their firms through speedier, more detailed, value-add reporting to investors. In addition, LPs are looking to interact with their GPs in a more digital and data-driven manner, gaining access to information about investments in new and deeper ways.

As well as supporting fundraising, how else can fit-for-purpose, future-proofed back-office infrastructure support front-office activities?

A rigorous back-office capability is essential for GPs who want to offer more co-investment opportunities, take advantage of the liquidity offered through NAV financing, or are considering GP led deals that require solid accounting and reporting frameworks. These are all inherently data-driven activities, which means that the way in which they will ultimately be delivered will be through the use of technology.

What role is technology playing in supporting the modern private equity operating model more generally, and what opportunities does this present?

Technology is undoubtedly playing an ever more important role across the private equity industry. This initially played out in the back office, with various types of financial statement reporting, cash management solutions, as well as workflow and case management tools coming to the fore. Then, in the middle office, we started to see a focus on fund performance and portfolio monitoring, with information being collected across asset classes to support risk management and sophisticated reporting.

Finally, in the front office, technology is now being used to support investment and diligence processes, as well as investor relations. What I think is particularly new and exciting is the proliferation of specialist private markets tools that we are able to leverage today. This is in complete contrast to what was available a decade ago.

It used to be that if an alternatives manager was looking at an aircraft lease, for example, we would have to adapt that into the fund accounting system in the form of some sort of bond. That is no longer the case. Technology now has the language of alternative investing built into it, enabling us to provide different views on risk, better access to data to support superior decision making, and allowing LPs to actively monitor their investments.

The other area where we are seeing significant changes, and where development is primarily driven by LPs, is an enhanced digital experience. It’s still early days, but we are seeing generative AI being used to answer client queries, to leverage large knowledge bases and to respond to requests for proposals. Then, from an operational perspective, optical character recognition is being widely used to make tasks that were historically manual more automated.

Looking ahead, I cannot think of a single operational function where we won’t be using some sort of AI to either extract or manage information differently, or to start drawing conclusions based on that information to support reporting or decision-making, at some point in time.

However, the focus should not just be on AI, but automated machine learning as a whole the process of taking upstream and downstream data and standardising it – given the sheer volumes of financial documents that come into play.

To what extent is artificial intelligence being integrated into digital solutions?

Technology is being used to create great UI, visualization and mobile access, for example. A wide variety of digital interactions – from something as simple as getting a K-1 in the US to performance analysis, cashflow fore[1]casting and benchmarking – have all become, if not the norm, then certainly the expectation for investors. Alternatives have become a much more digital and data-driven industry.

Is the rapid adoption of technology also creating challenges?

I would say the biggest challenge for managers involves data management. While we have made great strides in systems that speak the language of alternatives, we are nonetheless faced with significantly increased demands from clients – both GPs and LPs – when it comes to managing that data. Of course, the cloud has helped us a great deal in that regard, but there is still a lot of hard work involved in operationalizing data that has historically been manually inputted into spreadsheets. Finding ways to ensure that data can be accessed and analyzed in sophisticated ways is something that will certainly be enabled by technology, but there is still some way to go.

The service that an administrator provides reflects directly on the manager. It is a reputational issue for GPs, and therefore for LPs too. LPs are looking to interact with their GPs in a more digital and data-driven manner.

How are all of these developments impacting the decisions that managers are making around what to outsource and what to keep inhouse, and how are third-party providers responding?

Rather than investing large amounts of capital into ever-expanding back-office teams and technology, managers are increasingly working with third-party administrators in order to benefit from the scale, cost advantages and specialized back-office focus. This enables managers to instead invest capex into their core business of dealmaking. In response, fund administrators are evolving their offering from the provision of basic outsourced fund accounting services to providing technology best practices, together with support for managers to enable effective implementation and harness technology in modular operational models.

What is particularly exciting for us is that we are receiving a lot of inbound interest regarding solutions to many of the challenges that I have described. Those enquiries sometimes center on the use of data to support better investment decision-making, for example, or the need to provide different types of information to end clients.

The focus can also be on improving the manager’s cost profile. In short, managers are looking to third parties to fulfil functions that they either can’t or don’t want to invest in at the level that an external provider can. Another driver, meanwhile, is the desire from managers to partner with organizations that are able to glean insight and experience from working with market participants across the entire industry.

As a result, third-party administrators are being approached not only as outsourced service providers but as accelerators for the strategies that their clients are trying to implement.

Is the choice simply between insourcing and outsourcing, or are other models emerging?

Co-sourcing is certainly a trend. That is something that managers are talking to us about and it is something that we have the flexibility to implement. However, I would add that most of those conversations are followed by questions about what our plans are as a third-party administrator to provide some of those functions in a fully out[1]sourced manner.

Co-sourcing is typically seen as a step on the journey towards outsourcing.

What questions should LPs be asking of a potential outsourced provider?

Operational excellence is, of course, incredibly important in this space, because the service that an administrator provides reflects directly on the manager. It is a reputational issue for GPs, and therefore for LPs too. Other sources of differentiation among third-party providers include the degree to which these organizations are investing in their own core systems and operations in order to take advantage of industry trends. GPs should also select an expert partner with firsthand experience in managing processes across multiple strategies and different investment vehicles.

An understanding of cross-jurisdictional knowledge is also vital, should they wish to expand investment beyond their regional boundaries. In addition, LPs should consider the extent to which administrators are investing ahead of the curve, thinking about the next wave of innovation, whether that be generative AI, sophisticated data management or the provision of different ways for LPs to access information.

That kind of forward-thinking approach can help put managers on the front foot when fund[1]raising, and give LPs the comfort that operations are being well run by experienced industry specialists, and that it can scale as their firm grows.

What is your number one piece of advice for a manager re-evaluating its existing operating model with the intention of building something that is sustainable and that will allow it to scale?

My number one piece of advice would be to take time to review the market. I would add that it is also important to understand that the role of the fund administrator has changed.

Today, the right outsourced partner can provide operational support from back-office accounting, all the way through to client services, thereby enabling firms to focus on their own value proposition in a very different and much more sophisticated way.

technology lady looking at data on laptop

Private debt has encountered explosive growth as an asset class in recent years. The industry started out 2024 with $1.5 trillion in assets under management, up from $1 trillion in 2022, according to Morgan Stanley.

As direct lenders and broadly syndicated loan managers seek to grow their funds and returns alongside this industry growth and investor demand, the burden of their fund operations can begin to have an effect on their success.

This is especially the case with loan agency operations, known for their intense level of work across complex credit investments at high quantities.

Under these industry conditions, using a loan agent becomes much more appealing for many managers, and firms who already depend on a third-party loan agent may look to increase their outsourcing or select a new provider that more closely meets their needs.

To understand more about loan agency and how a good loan agent operates, read on.

What is a loan agent?

In the credit and private debt space, a loan agent is the party that facilitates all ongoing operations required to adhere to the loan terms and liaises between the lenders and counterparties to do so. Tasks that are central to loan agency include:

Calculating a loan’s interest over time

Coordinating loan and interest payments between multiple lenders and counterparties

Sending loan communications between lenders and counterparties

Engaging outside parties like lawyers or fund administrators to move along loan operations

There are a few different kinds of loan agents depending on a lender’s needs or depending on the nature of the loan:

Administrative agent

A lead administrative agent, or a named agent, fully represents the lender on the loan and is named in documents as the administrative agent. By taking this lead administrative agent role, the partner takes over all loan agent responsibilities from the lender.

Sub agent

The sub agent role exists for lenders who want to take the lead role in the loan agency process and be listed as the lead agent on their own deals. For the behind-the-scenes responsibilities that they hope to outsource, they would work with a sub agent who is not named on the loan but handles elements such as payment distribution and managing interest rates.

Successor agent

A successor agent steps in when the administrative agent resigns or is replaced, a situation that frequently arises in restructuring scenarios and liability management exercises (LMEs). This change can disrupt the smooth administration of a credit facility and potentially delay the LME or restructuring process. Acting as a neutral third party, the successor agent ensures a seamless transition, aligning the goals of all involved parties and facilitating a the swift progression of the constituents’ objectives and desired outcomes. At Alter Domus, we’ve served as successor agent on many high-profile LME and restructuring deals such as Amsurg, Apex Tool, Boardriders, Brightspeed, Revlon, Trinseo, and Wheel Pros, among many others.

What to look for in a loan agent

While lenders can insource loan agency responsibilities, many choose to outsource some or all of this imperative, labor-intensive fund operation. By outsourcing these responsibilities to a loan agent, lenders benefit from tighter headcount in their operational teams and the close attention and expertise of teams specifically focused on all aspects of the loan agency process.

But not all loan agents are created equal. Loan agency involves painstaking and bespoke work to carry out the terms of a loan over the multiple years of its life. When evaluating partners to serve as a loan agent, here are some key elements to help decide if they’re up for the task:

A balance of bespoke expertise and ability to scale operations

As the direct lending and BSL spaces grow and managers hone their strategies along with that growth, more complex loan terms and transactions emerge. It’s encouraging to see our industry mature in this way, but it does make for more complex fund operations, particularly on the loan agency side.

For a loan agent to work effectively, they need to have direct and deep expertise in these bespoke strategies and debt vehicles. At Alter Domus, we pride ourselves in operating at the intersection of bespoke expertise and high volume. Our servicing teams are segmented out by asset class expertise and work cohesively for an end-to-end approach, as opposed to the siloed operations of our competitors. We have the experience and the team size to achieve the balance needed for fickle loan agency challenges.

Technology-enabled service

Loan agency services may take plenty of time, attention, and expertise from your provider, but it’s also crucial that your provider has capable technology underpinning their loan agent duties. When a provider relies too much on manual processes in administering loan agency, their lender client absorbs the high risk of error.

At Alter Domus our loan agency teams rely on our proprietary software platform Agency360 to service our direct lender and BSL clients. There are key benefits to relying on a proprietary tool for these needs. These loan services benefit from key advantages of using a proprietary tool – for example, we control the updates and maintenance of the tool ourselves rather than relying on software from a third party. We also avoid having to pass along rising fees from a third-party platform.

A reliance on powerful technology should also extend to the client experience. When outsourcing loan agency operations, lenders should still have a view into the service they’re receiving and a 24/7 ability to access their loan data and reporting. A third-party loan agent should offer a tech-enabled and convenient way to check in on their operations and download relevant reporting.

At Alter Domus, we offer Agency CorPro as a home base for our clients. The proprietary portal platform serves as our purpose-built solution to exchange sensitive asset information and important loan documentation between our teams. That means our work is available to you at all times in a self-service fashion.

Breadth of loan agency and other middle and back-office service capabilities

An ideal loan agent should offer additional services throughout the loan lifecycle to support your operations. By placing multiple outsourced needs with the same firm, your teams can benefit from a more holistic data and technology experience.

At Alter Domus, we’re experts in private debt and BSL, and cover the full range of credit middle office services for these asset classes, from loan servicing to fund administration to borrowing base administration. We know that every operational model is different at each firm, and we are able to customize our services and delivery model to any setup your firm prefers, including outsourcing, co-sourcing and managed service models.

Optimize your loan agency operations with Alter Domus Agency Services

As a top provider in the market, Alter Domus’ Agency Services offering meets all these needs and more. Our servicing teams are trained specifically in bespoke credit vehicles and are large and experienced enough to handle high volumes of loans. In fact, our peak seasons see us processing more than 100,000 payments in a single day.

Ready to see what Alter Domus can do for your loan agency needs and beyond? Learn more about Alter Domus’ Agency Services here. To speak with our Agency Services team about how our services can help your middle- and back-office operations, contact us here.

technology close up of data on screen and paper scaled

Credit markets have changed profoundly since the 2008 fiscal crisis, with broadly syndicated loans (BSLs) and private credit replacing bank lending as primary sources of debt for corporate and private equity.

As banks tapped down lending activity in the aftermath of the 2008 credit crunch to focus on repairing balance sheets, BSL markets and successively private credit managers stepped in to fill the gap and have not looked back.

According to Preqin figures private debt assets under management (AUM) have increased more than four-fold during the last decade, and currently sit at approximately US$1.6 trillion. Leveraged loan markets in the US and Europe, meanwhile, have seen loan issuance more than double since 2015 to exceed US$1 trillion in the first half of 2024, according to figures compiled by law firm White & Case.

As private credit and BSL markets have grown, so has competition, and to differentiate their propositions, lenders and private credit investors have adopted more sophisticated and complex credit strategies.

Previously private credit and BSL would focus on servicing different borrower groups, but as strategies have evolved, head-to-head competition for the same deal opportunities has intensified. Pitchbook figures, for example, show that US companies refinanced more than US$13 billion of private debt in the BSL market during the first four months of 2024, a 180-degree flip from the second half of 2023, when most borrowers were refinancing BSL borrowings with private debt.

Market evolution drives middle office transformation

As competition across credit markets has ramped up, lenders have had to reappraise their middle office operational and technology infrastructure and ensure that the administration of the individual credits in their portfolios is efficient, accurate, and as frictionless as possible for borrowers and other key stakeholders.

In a crowded market, where borrowers have a wide pool of lenders to choose from, a reputation for best-in-class middle office service – including tasks such as loan accounting, loan agency, trade settlements, interest rate payments, borrower and lender communications and borrowing bases – can serve as a point of differentiation for companies and sponsors when selecting a credit partner.

The last 24 months of dislocation across credit markets have served to further emphasize just how valuable and important middle office capability has become for credit managers.

As interest rates have climbed, so have the costs of floating rate debt structures, which have added to the workloads of credit middle offices, which have in turn had to keep track of agency notices, rate resets and margin changes. Covenant compliance and loan amendment negotiations have also increased in volume as financing costs have climbed, directing further demands into middle office in-trays.

Managers and lenders that had been able to get through with lean middle office operations in bull-markets have had to reengineer middle office operations to keep up with the higher volumes of increasingly complex and important loan administration workloads.

Middle office support

Instead of hiring in much larger middle office teams and locking up cash in capital expenditure to keep pace with rising middle office workloads, credit providers can take advantage of the technical and technological expertise of an outsourcing partner to put in place a middle office model that is flexible and scalable.

Alter Domus, for example, has supported credit provider clients with comprehensive loan servicing and monitoring support for more than two decades, and has built up the specialized expertise and technology stack to cover the ever-intensifying technological and operational asks of middle-office credit teams.

All aspects of loan servicing needs can be handled by Alter Domus across our middle office service offerings:

Our Loan Agency offerings via our Agency Services team allows us to serve in a variety of agency roles including named administrative agent, sub agent, successor agent, and more. In doing so, our teams handle jobs including counterparty communication, oversight of covenant compliance, and agency notices.

Our Loan Services offerings provide an array of coverage including loan accounting, loan servicing, trade settlements, and CLO services. This includes support for key structural elements such as the CLO overcollateralization test. Our teams are perfectly positioned to take care of complex, time-consuming day-to-day workflows that are essential to the life of a loan.

Our Loan Monitoring solutions provide digitized, normalized financial information from borrowers delivered to your monitoring solution of choice or our modern portal.

Our middle office servicing relies heavily on our proprietary administration platforms CorTrade, Agency360, Solvas, and VBO to support clients across a broad suite of accounting, modelling, and credit risk solutions. Alter Domus’ tech platform covers all these tasks, and others, with an interface that can operate within a client’s portfolio management system and process a wide range of reporting, data, and internal accounting functions.

When reviewing middle office infrastructure capability, it is also crucial for managers to ensure that the middle office links in to both the front and back office, and that teams in these three functions are not operating in siloes.

Each team will often use different systems, technology platforms and servicing teams to execute their core functions, but it is important that all functions are integrated, and that there is a secure, accurate data trail that can be traced from the beginning to the end of the loan lifecycle.

Our firm has leveraged our credit and technology expertise to help several credit providers build data bridges between the technology and software used in separate functions, and integrate data from preferred front-office, middle-office, and back-office platforms to ensure data veracity.

Working with a partner like Alter Domus enables credit providers to focus on their core business of originating opportunities, assessing risk, and underwriting new financings, confident in the knowledge that they have the middle office support in place to manage loan servicing tasks to the highest industry standards.

technology colleagues sat in row discussing data on a screen scaled

In what has been a challenging period for alternative investment managers, the private debt asset class has been a standout performer.

According to McKinsey, private debt generated stronger returns than all other private market asset classes in 2023 and was the most resilient for fundraising.

Rising interest rates benefited private debt firms, due to the floating rate structures that gains when base rates climb. This has driven ongoing investor demand for the strategy, proving its ability to deliver attractive risk-adjusted returns across the investment cycle.

The robust performance of private debt strategies through the recent period of market dislocation and uncertainty follows a period of remarkable growth for the asset class.

Private debt assets under management (AUM) have more than quadrupled during the last decade, according to Preqin figures, and currently stand at approximately US$1.6 trillion. And according to BlackRock, the private debt industry is well-positioned to sustain its growth trajectory. AUM forecast is set to reach US$3.5 trillion by the end of 2028 as borrowers continue to favor the bespoke and flexible financing structures offered by private debt managers, and investors, many of which are under-allocated to private debt, move to grow their exposure to the asset class.

Preparing for the next cycle of expansion

For private debt managers, the rapid increase in industry AUM has brought their franchises to an organizational tipping point.

Private debt firms are not only managing larger pools of capital for a more diverse, demanding investor base, but are also executing increasingly complex investment strategies that have expanded beyond bilateral, middle-market loans into big-ticket club deals and opportunistic purchases of debt tranches.

Unlocking capital from a global investor base and expanding deal pipelines into new areas have opened exciting opportunities for managers. However, capitalizing on these prospects will require private debt firms to upgrade their operational infrastructure to sustain their growth.

Managers have not only had to enhance their back-office fund accounting and investor reporting functions to serve an increasingly demanding and sophisticated investor base, but also their middle-office loan servicing and loan administration services to borrowers and the companies to which they lend.

The lean operations that supported private debt through its first phase of expansion will have to be upscaled to ensure that managers can maintain operational nimbleness, and the ability to measure performance while tracking risk, as transaction volumes rise.

Increasing middle and back-office capabilities do pose operational challenges for managers. Staff and technology costs ramp up, while the impacts of additional processes, sign-offs and internal bureaucracy can compromise the agility and responsiveness that have underpinned previous success and growth.

It has also become crucial for managers to establish seamless links between front-office dealmakers, middle-office, and client-facing teams that support borrowers, and back-office teams managing fund accounting and reporting.

Key areas for consideration

As private debt managers enter the next phase of the asset class’s evolution, there are three key questions that should be asked before embarking on an operational overhaul:

Does integration exist through the front, middle, and back office?

While the oversight and investment management of a private debt fund does have similarities with other alternative asset classes such as private equity and real assets, there are specific deal structuring and fund accounting requirements that are unique to private debt.

Loan structures, for example, will include multiple tranches, varying rates and payments of principals and interest. Managers must also be able to source and analyze data in markets where public information is less available than in syndicated loan and bond markets.

The fund accounting required to track and report on private credit portfolios and investments is also vastly different from what is required in private equity portfolios, for example.

As managers expand, it is essential that their accounting and operating teams have the requisite experience to handle the specific demands of private debt fund accounting and reporting.

It is equally important for private debt managers to have the middle-office capabilities to take loan agency responsibilities, such as for individual investments, handle all trade settlements and interest rate payments, and to administer borrowing bases.

Outsourcing or in-house?

Managers must decide if it is best to outsource both back- and middle-office functions as their operations grow or invest in building additional infrastructure in-house.

Keeping operations in-house gives managers direct control of loan operations, fund accounting, and data, which has its advantages, but does come with high upfront costs and makes it more difficult to scale up back-office resources in the future.

Outsourcing to a third-party provider allows managers to benefit from the global reach and extensive industry expertise of fund administration specialists. It is also important to factor in that when a manager ramps up the size of internal teams, the GP bears those costs. In contrast, when outsourcing, the costs of administration are covered by the fund.

If managers do choose to go down the outsourcing route, it is crucial to have clarity on what infrastructure and technology will have to be retained internally to oversee, engage, and interact with a third-party fund administrator.

Managers must also be clear on the scope of work that a loan servicer and fund administrator can handle. Not all partner firms, for example, can deliver portfolio accounting via their loan administration systems.
Managers should be clear on exactly what support they require and whether the administrator can meet that request.

How will data challenges be addressed?

Data management poses distinctive challenges in a private debt context, as different teams within a firm have different technology and data requirements.

Investor relations teams, for example, want to access performance data to report to LPs, while operations teams prioritize the data requirements of investment professionals and fund accountants want to ensure that books are up to date.

This has seen the asset class move away from single systems, which aim to cover the full loan cycle and serve as a “single source of truth,” to a model where there is an interlinking patchwork of technology platforms and servicing teams.

As data linkages between different operations and teams grow in importance, the middle and back office must become more fluid and integrated.

Ensuring that the data linkages between these teams and their respective technology tools are fully integrated and seamless is complex and impacts how back-office and mid-office functions are structured.

Whether outsourcing or keeping operations in-house, firms must ensure that operating models are structured in a way that aligns the back office and middle office teams and helps to facilitate the “front-to-back” integration required to support multiple complex front office investment management tasks.

Curating an operating infrastructure that covers these priorities and meets the specific demands of each individual private debt manager lays a firm foundation for building a scalable operational model that can grow with a private debt platform.

The value of a supportive loan servicing and fund administration partner

Transforming an operating model is demanding and can distract managers from their core front office investment management priorities.

Working with an experienced servicing partner and tech provider like Alter Domus, which has extensive asset class experience, a clear understanding of how private debt managers work, and insight into the key operational priorities they are seeking to address as their organizations grow, eases implementation and ensures that managers are putting the right structures in place.

We have the resources and expertise to help private debt managers take their operating models to the next level by streamlining processes and harnessing technology, and have supported clients’ operational requirements in the following ways:

Provision of a full suite of services

Alter Domus provides an end-to-end service to private debt managers that covers every operational requirement, including loan administration, portfolio accounting, loan agency, loan servicing, and fund administration, as well as full data integration across these functions.

Technology expertise

Alter Domus has successfully implemented proprietary technology to support all its services. Alter Domus’s Solvas platform, for example, integrates accounting, modelling, and credit risk solutions to serve as our proprietary loan administration system.

This means Alter Domus can integrate data and operate within a client’s portfolio management system, providing regular reporting and data feeds that allow clients to update their internal accounting systems.

Data integration

Alter Domus’s technology expertise means it can also support private debt managers with the design of technology stacks and operating models that support data integration.

We can help clients to connect the various preferred technology tools of their teams and facilitate the fluid movement of accurate data between different teams and across different technology platforms. This ensures that there is a golden copy of all data throughout the full loan and fund lifecycle.

Partnering with a firm like Alter Domus can help private debt managers to re-energize their focus on strategic growth and ensure that their support structures are agile and fit for purpose in a private debt asset class that continues to grow, develop, and become more competitive.

Private debt funds: An in-depth guide

What is a private debt fund?

Why have private debt funds become popular?

Benefits of private debt

Types of private debt funds

Direct lending funds

Distressed debt funds

Mezzanine debt funds

Special situations

How private debt funds are structured and managed

Limited Partners (LPs)

General Partner (GP)

How private debt funds work

Identifying investment opportunities

Initial deal screening

Creditworthiness assessment (risk & return evaluation)

Due diligence

Deal structuring

Investment committee approval

Execution and funding

Ongoing monitoring

Key investment strategies for private debt funds

Sector-focused investing

Covenants and protections

Diversification

Common questions about private debt funds

How liquid are private debt funds?

What are the fees and costs associated with private debt funds?

Final thoughts: Understanding private debt funds

The AD Score – An objective framework for optimal portfolio allocation

Key contacts

Eric Tannenbaum

Insights

When Borders Become Background: Operating Across Jurisdictions

Performance and Purpose: How Endowments and Foundations Govern Long-Term Capital

Agency as a First-Order Risk Decision in Private Credit

Private debt outlook & key market trends for 2025

Regulatory changes influencing private debt

Leveraging global trends to expand in private credit

A good time to be in private debt

The full scope of private capital outlooks

Key contacts

Greg Myers

Alter Domus launches office in Manila

Insights

When Borders Become Background: Operating Across Jurisdictions

Performance and Purpose: How Endowments and Foundations Govern Long-Term Capital

Agency as a First-Order Risk Decision in Private Credit

Fit for the future

Insights

When Borders Become Background: Operating Across Jurisdictions

Performance and Purpose: How Endowments and Foundations Govern Long-Term Capital

Agency as a First-Order Risk Decision in Private Credit

CLO Summit 2024

Key contacts

Lora Peloquin

Randall Reider

Tim Ruxton

More events

Infrastructure Global Summit

NCREIF Spring

PERE Asia Summit

Acing loan agency: What to look for in an administrative loan agent

What is a loan agent?

What to look for in a loan agent

Optimize your loan agency operations with Alter Domus Agency Services

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Infographic: Private debt’s renaissance by the numbers

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The credit middle office: navigating complexity in a competitive market

Market evolution drives middle office transformation

Middle office support

More events

How private debt managers can scale their success by optimizing their operational models

Preparing for the next cycle of expansion

Key areas for consideration

The value of a supportive loan servicing and fund administration partner

Key contacts

Greg Myers

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