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Considering the rapid increase in interest in private assets, including residential home loans and private credit, more specifically, as an asset class, how can managers ensure that their teams are optimised to manage asset inflow and growth objectives?

This was the question put to several industry experts at a recent Clear Path Analysis webinar, which now forms our latest Fund Operator report, “Addressing operational challenges around launching a private credit strategy”, sponsored by Arcesium.

“When considering going into the market, it is about starting with an

inward assessment of the manager’s resources."

Representatives from Arcesium, Oaktree Capital Management, Bayview Asset Management, Russell Investments and Macquarie Asset Management – share their views and practical advice on achieving good results.

Gavin Lau, Managing Director, Head of Private Credit Fund Management, Macquarie Asset Management, said there were three key facets of this equation to look at.

“When considering going into the market, it is about starting with an inward assessment of the manager’s resources, so, if I put myself in your shoes, am I looking at an in-house solution where I build everything internally or would I like to start with an outsource model,” he said, breaking it down for the audience.

The second point is around core competency, what can you lean on internally from the specialists you have in-house versus everything external, is an FX manager going to outsource your onboarding, etc.?” he said.

Private markets have come into favour because the business models that have dominated asset management for years have nearly run their course, said Bain & Company in a paper on “riding the wave” of private markets. It urged companies to develop new front-to-back-office capabilities to deal with the operational strain of private assets. “This can be accomplished through salesforce training, onboarding product specialists, and redesigning operations, technology, risk, and legal processes.”

Lau said the core competency factors need to be kept close. “The objective here is to build end-to-end processes from the outset that covers operations and governance controls through this growth period.”

A panel at Private Markets Investor | Europe 2023 said that the area had several key operational sections to focus on for immediate improvement. “We need workflow tools to support key operational processes, fund onboarding, and drawing down deals,” said Tim Harrison, Head of Business Technology Partners, Intermediate Capital Group. “These processes can be streamlined, and handoff points and collaboration tools between teams can be improved so that workflow is more seamless.” 

“These may seem fragile at first in that you may find hiccups and you will spend days fixing this but over time it will become more robust at which point you can start scaling,” he said. This scaling capability will be traded off with investor demands as you do not always want to jump when an investor says so, but this comes with experience and when you get through your first fund and then different vintages.

Another point is the alignment of your business with other operations. “What I tend to find is that having that intimate feedback loop with your investor relations team is important,” he said. “Also, your management team and what their aspirations are for the product they want to launch. It is about what kinds of structures are available to you and is it scalable around the volume of transactions over a 10–15-year fund life. You do not want something that you can offer in the first twelve months, but which is a manual process over the next 12-15 years as that is not where you want to be.”

“You want to consider what characteristics of funds you are looking into."

Another facet he added was the importance of having a fundraising team that has initiative. He emphasised how a company needed to have a team that could “go out to market to understand where in the capital structure you would like to invest”, as well as what that means in net cash yield returns (from a credit perspective), but also the internal rate of return (IRR) range that the company will be marketing to, which would be critical.

“You want to consider what characteristics of funds you are looking into; would you like to be a deep niche offering where you are a specialist in certain areas of the market?” Lau said. “Or, would you like to be a diversified shop offering access to different pockets of private credit?”

An important factor he explained that could be often overlooked is the US versus European platform consideration. This is important, as they are contrasting markets with different expertise as well as fund structuring. “Would you like to go with a classic close-ended fund, an evergreen fund or something in between such as a hybrid?” he said.

Ultimately, Lau said, any company ramping up private assets operations simply needs the economics to work. Nothing will work unless it’s profitable in the long term. “This is your human capital plus your capital investment in your technology stack,” he said. “It also needs to be viable and sustainable, and this means you can hold your top-line revenue, which is your fees, and you can control your costs to preserve your margin.”

Whether or not it’s as simple as that will remain to be seen for many in the industry.

You can see more of Lau’s thoughts here.

You can read the report in full here.

 

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