Bridge the Gap
Don’t accept disconnected loan reporting and accounting data...
in Fund and Corporate Services
Bridge the Gap
We’ve fully integrated our market-leading private credit loan reporting and accounting systems to provide you with a single source of truth.
Don’t accept disconnected data... in Fund and Corporate Services
The results? Information on demand, data you can trust and real time decision-making. And with our dedicated team of private credit professionals by your side, you’ll have specialist expertise you can call on every step of the way.
To find out more visit aztec.group/private-credit
Green shoots emerge in fundraising climate
GREEN shoots are emerging in private debt fundraising after a challenging few years, with industry stakeholders cautiously optimistic about a market recovery.
Muted M&A activity, macroeconomic jitters and the so-called denominator effect, whereby Limited Partners (LPs) were over-allocated to alternatives amid public market volatility, have dampened private debt fundraising in recent years.
A peak of $240.8bn (£181.5bn) was raised globally in 2021, according to Preqin data, falling to $225.4bn in 2022 and $214bn in 2023. Just $133.4bn has been raised this year, as of 17 September.
“Fundraising has clearly been more challenging over the last few years, but green shoots are now visible,” says Kirstie Hutchinson, a partner at Macfarlanes who focuses on sponsorside leveraged and acquisition financing.
“There are quite simply a lot of credit
funds in the market and LPs have become more sophisticated in their understanding of the terms available to them, often deploying to multiple managers.”
While industry stakeholders are cautious about the pace of recovery, there are signs that investors are taking a more long-term and balanced approach to private credit.
“Overall fundraising conditions remain tough, but data from the latest Rede Liquidity Index hints at ‘green shoots’ in
the market,” says Gabrielle Joseph, managing director, head of client development at placement agent Rede Partners.
“We saw a fall in the number of LPs seeking to expand their commitments to incomeoriented private credit funds. This is likely related to changes in expectations for interest rates. We saw a steep rise in LP sentiment toward private credit during 2023, but this appears to now have become more normalised. LPs are planning to build out a balanced portfolio
construction rather than ‘load up’ on credit in the short term.”
Despite market challenges, there have been some record fundraises in recent months. Ares Management raised $34bn for its latest direct lending fund in July, while Goldman Sachs said in May that it had attracted more than $20bn in commitments for West Street Loan Partners V.
“The exceptions are the recent standout record fundraises by large managers with well-
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Private credit’s retail push has really gathered steam over the past month.
BlackRock and Partners Group have launched a private markets product that will provide retail investors with access to private equity, private credit and real assets in a single portfolio. And State Street has teamed up with Apollo Global Management to create an exchange traded fund that invests in both public and private credit, which will be marketed to retail investors.
Meanwhile, DWS’ Dan Robinson recently told Alternative Credit Investor that the firm is assessing how to “dramatically improve liquidity” in private assets in order to serve the retail market correctly.
It’s no surprise that Preqin recently predicted that the private wealth channel will emerge as a key source of capital for the alternatives industry.
However, I’m intrigued to know how easy it will be to grow this distribution channel infinitely. Many wealth managers and private bankers I’ve spoken to are wary or uninterested in private debt, which suggests there are some segments of the market that will be harder to win over than others – particularly for smaller fund managers with more diminutive marketing budgets.
The entry of large, familiar names into the private credit space and a lengthening industry track record should help matters to an extent, but I suspect there is still substantial work to do before the wealth channel becomes a true contender for institutional funding.
SUZIE NEUWIRTH EDITOR-IN-CHIEF
cont. from page 1
established track records and strong diversification,” says Macfarlane’s Hutchinson. “In other words, we have seen a trend for allocators to consolidate into larger funds in a flight to scale, more risk-averse strategy.”
Fabrice Dumonteil, chief executive and founder of Eiffel Investment Group, has also seen investors opting for more established fund managers.
“We are clearly seeing some LPs consolidating their relationships with managers that have a long and stable track record (ability to deploy capital rapidly and to generate good returns without excessive risks in an economic context that requires more skills and experience to navigate) and that offer something more,” he said.
“As a further illustration of this trend, a few of our
LPs even outsourced large parts of their corporate private debt to us.”
Kyle Asher, managing director, co-head of alternative credit solutions at Monroe Capital, agreed that investors are starting to allocate “considerable funds and attention to alternative credit” particularly when it comes to various asset based and opportunistic strategies that are not distressed necessarily.
“They are viewing this as a way to complement their private debt allocation and earn higher
returns,” said Asher.
Meanwhile, Timothy Lower, a founding member of Ares’ direct lending business who is now chief executive of Willow Tree Credit Partners, added that the recent Federal Reserve rate cut should stimulate M&A activity and loan issuance supporting new platform acquisitions.
“As M&A activity resumes, distributions to LPs should stimulate more robust fundraising across alternatives as investors re-deploy returned capital,” Lower said.
debt historical fundraising ($bn) as at 17 Sep 2024
“Investors have recently voiced an increasing appetite for core and lower middle market strategies over upper middle market due to concerns about portfolio overlap among managers and lack of diversification; slow deployment due to the resurgence of the CLO market and decreased M&A activity; and poor documentary standards that may challenge recoveries.”
A report from Preqin, released last month, also suggested that lowerthan-expected rates could be beneficial to the private debt sector. But ultimately, a recovery in fundraising is unlikely to happen overnight.
“Our research shows us that momentum is building slowly, with LPs becoming more confident, particularly in sectors like healthcare, technology, and lower mid-market buyouts,” said Rede Partners’ Joseph.
“However, the exit environment, including M&A and IPO activity, will play a crucial role in any further recovery. A full-blown recovery in fundraising will depend on broader market conditions and LP liquidity. Fundraising success will continue to be hard-won for the foreseeable future.”
Private
Rising investor demand for litigation finance coincides with higher losses
INVESTORS have been piling into the litigation funding space in search of triple-digit returns but experts have urged newcomers to be aware of the risks in the market.
Litigation funding has become a popular segment of the alternative lending sector in recent months, with litigation funding specialists attracting interest from both institutional and individual investors. Last month, litigation funding specialist Nera Capital secured a £20m investment from Fintex Capital, and AxiaFunder has seen a significant rise in its funding volumes this year.
Meanwhile, private credit fund managers have been inching into the space. Aperture Investors, the alternative investor backed by Generali Investments, recently hired Victory Park’s Luke Darkow to develop and run its first
litigation finance strategy.
However, veterans of the litigation financing market have warned that investors should be made fully aware of the risk of capital loss depending on the outcome of each individual lawsuit.
Cormac Leech, chief
executive of AxiaFunder told Alternative Credit Investor that AxiaFunder’s funded volumes were up by approximately 150 per cent during the first half of 2024 year-on-year. However, the litigation finance platform has recently experienced its first losses.
To date, 17 commercial lawsuits have been fully funded on the AxiaFunder platform. Six of these are ongoing, while nine cases have been won and two have been lost. Investors have generated returns of between -96 per cent and 175 per cent to date, depending on which loans were backed.
EIF increases allocation to ‘green’ managers
THE EUROPEAN Investment Fund (EIF) has been increasing its allocations towards specialised fund managers to support the transition to net zero.
Francesco Battazzi, head of diversified debt funds at the EU’s state development lender, outlined how private debt fund managers are helping to support its green agenda.
“While generalist
investment strategies are essential for a competitive capital market, the EIF has increasingly focused its allocations on specialised fund managers,” Battazzi told Alternative Credit Investor. “Acting as an anchor investor, the EIF supports new thematic funds focused in areas critical to environmental sustainability and energy transition.
“A growing portion
of EIF investments are dedicated to promoting sustainability and green transition within the European private debt market, with many funds qualifying as Article 9 financial products under the Sustainable Finance Disclosure Regulation, targeting environmentally sustainable investment objectives.”
Green priorities for the EIF include initiatives that combat global
warming, focusing on energy transition, climate adaptation, and mitigation.
“An increasingly important area of interest is innovation, we consider private credit as a means to offer non-dilutive financing options for European cleantech and deeptech companies,” Battazzi added.
Go to page 14 to read the full profile with Battazzi.
Bridge the Gap
We’ve fully integrated our market-leading private credit loan reporting and accounting systems to provide you with a single source of truth.
Don’t accept disconnected data... in Fund and Corporate Services
The results? Information on demand, data you can trust and real time decision-making. And with our dedicated team of private credit professionals by your side, you’ll have specialist expertise you can call on every step of the way.
To find out more visit aztec.group/private-credit
Private credit fund managers embrace AI despite risk warnings
JUST a year ago, artificial intelligence (AI) was being touted as the next big thing in private credit. Today, it has firmly established itself as part of the private market ecosystem, in a variety of ways. Many investment houses are already relying on AI to automate their backoffice processes and free up junior analysts to do more specialised work.
However, a recent report by Moody’s found that AI has begun to be used in loan origination, causing the ratings agency to issue a warning to lenders.
“We generally expect that pools with assets underwritten by AIbased models will have relatively volatile losses, in part because of the short performance histories,” said the Moody’s report.
“In general, the shorter a lender’s history, the less predictable their loan performance is, especially as economic conditions change.”
AI will also be limited by the amount of data that fund managers choose to share, and the quality of the historical data which relates to ongoing loans.
“What's harder about AI and private credit, is that AI is only as good as
the information that it's being trained with,” said Cynthia Sachs, founding chief executive at data and technology firm Versana.
“And generally, most of the information to leverage for training is public data. But private credit is – as its name suggests – private. So you would have to be using private data to properly train the models.”
The use of private data has been a hot topic in the sector, but recently there have been more calls for data transparency in the pursuit of standardisation.
AI is already being used to automate invoicing processes and analyse large swathes of data in the private credit world. However, any real
standardisation effort would have to have the buy-in of multiple private credit firms, before any sector-wide analyses could be carried out.
It seems that the sector may get there sooner rather than later. Schroders Capital recently rolled out a new generative AI investment platform for its private markets business. It has been designed to speed up the analysis of large volumes of data within the private equity side of the business, but Schroders plans to eventually extend it to private credit as well.
And two AI specialists – Siepe and BlueFlame AI – have recently announced multi-million dollar funding rounds as they
seek to bring more private credit clients onboard.
Sachs added that Versana is currently looking at AI and other distributed ledger technologies.
“We're looking at future technologies and how they can help us build our future products,” she said. “So of course, our job is to make sure we're at the cutting edge of technology.
“But it takes time to understand it, research it, and to know which ones are right for us.”
The demand for private credit AI solutions is clearly there, and fund managers and service providers are showing a willingness to work together to find the right solutions for the sector. But the risks remain. This is still a relatively new technology and private credit is a sector which has historically been rooted in relationship building and mutual trust.
While AI can be a useful means of speeding up labour-intensive back office processes, fund managers would do well to heed Moodys’ warnings and exercise caution by rolling it out judiciously and maintaining a human element in key processes.
Beyond Excel
Technology is paving the way for private credit’s explosive growth – but are fund managers doing enough to integrate new systems? Kathryn Gaw finds out…
THE PHENOMENAL
growth of the private credit sector has created something of a gold rush for technology providers.
As smaller private credit outfits scale up, new technology has become a non-negotiable. Investors, regulators and ratings agencies are demanding evermore data transparency, and Excel spreadsheets can no longer cut it. Meanwhile, the new credit-based divisions which have been spun out of private equity managers have found that private credit comes with an entirely different set of reporting requirements and software needs.
Private credit needs systems in place which allow for the analysis of different loans. Each of these loans comes with their own risk modelling data, covenant monitors, and forecasting metrics. While this level of analysis can be achieved in-house, it is an enormous undertaking, and a lengthy process. So private credit fund managers have been turning to the experts.
“I've seen an uptake in managers saying, we now need a system,” says Kevin Hogan, head of private credit fund services at Aztec.
“I've seen many of them trying to redesign their operating model now that they realise they've got to that stage where there's a problem operating manually, and they
want to invest in a solution.”
Cynthia Sachs, founding chef executive of data specialist Versana, has also noticed this shift.
“If you look at the leaders on the banking side, they are massively investing in technology,” she says. “I don't think it's a question of should you or shouldn't you. I think it is, ‘yes, we are, and how are we doing it optimally?’”
Fund managers are meeting the need for new technology in three ways: they are outsourcing their tech needs to third party providers; they are investing in bespoke in-house solutions; or they are taking a hybrid approach.
Northleaf Capital operates one of these ‘hybrid’ positions, taking ownership of its overall architecture, while also using third party solutions to address particular needs.
“We have definitely relied on outsourced providers for the individual components, but as an organisation, we have a very large number of underlying positions to manage,” says Jon McKeown, managing director of portfolio strategy at Northleaf.
“We have the complexity of having credit and infrastructure and needing to bring all of this together. At times when we've looked at off the shelf solutions, it's been a little bit of a square
peg in a round hole situation. We've been willing to undertake the work to customise things and capture data in the way that we would like to see it organised. I think this has the benefit of bringing people closer to the data and taking more ownership.”
Over the past year, there has been a noticeable rise in the number of new tech solutions for private market products. In May, Aztec launched a dedicated alternative investment fund manager service in Luxembourg in response to client demand, and the firm is now expanding into the US market, where it sees even more opportunities.
“Pre-financial crisis, private credit was a relatively small piece
“ At times when we’ve looked at off the shelf solutions, it's been a little bit of a square peg in a round hole situation”
of the private markets industry as a whole,” explains Hogan.
“It's really picked up over the last 15 years. The attractive returns and the consistency of those returns are a different proposition in the private markets business today.
“And as a result, you get institutional investors coming in and they're allocating an awful lot more of their wallet towards the private credit market. What we've seen is a lot of our real assets clients in particular are starting
to branch into private credit.”
These clients come with a host of requirements which vary depending on their investor base. Insurers are more interested in the cash flow and duration of the loans, whereas pension funds tend to be more concerned about portfolio risk, outcomes, and sector trends. Others will only consider investment-grade private credit funds, which requires its own form of structuring. And then there are the relatively new retail products, such as ELTIFs, which are attracting individual investors into the sector for the first time. They want more data transparency. This ever-changing spectrum of investor needs makes it extremely difficult to standardise data within the private credit sector. Further complicating things is the fact that many private credit fund managers are industry veterans with their own way of doing things. They are used to Excel spreadsheets and manually inputting data on a loan-by-loan basis. In some cases this is unavoidable, but Aztec believes that there is room for much more efficiency.
“Typically, when you're in a private credit fund, there's a loan agent who looks at the specifics of the loans and the cash flows of the
loans, and communicates those to the borrower,” explains Hogan.
“A lot of that tends to be very manual. The efficiency of the market as a whole, I think, is going to get much better when that agency data becomes normalised, when we have a way that agents can produce standardised notices in a more tech-friendly manner for consumption automatically.”
However, even with the support of third parties, there is a certain amount that fund managers simply have to do in-house. For instance, Hogan says that it is important for private managers to have their data programme and technology solutions ironed out before onboarding a fund administrator.
“There's only so much that an administrator can provide to you in terms of what data points we've captured, what we've put on the system, what we can feed over, and we can do that in a very efficient manner,” he says. “But there are elements that are outside the data set that must come from different sources.
“Private credit managers need a way to house the data coming from external sources such as administrators, with the data that they have or that they provide themselves.”
Northleaf’s McKeown has historically worked with Microsoft systems such as Power BI, as well as external tech providers. He believes that the next step in private credit technology is integration.
“The more interchanges you have where you break between systems, the more possibility there is for error,” says McKeown.
“You may have one or two small pockets where an output will be taken from one source, and there will be a manual manipulation
in order to have it be ready to be put into the next part of the system or the process.”
“I think the important thing for all administrators is the ability to play your data back in whichever way the investment manager wants to receive it,” agrees Hogan. “The ability to frequently deliver data in a seamless fashion, automatically out of the system to be consumed in a way that they, the investment manager, want to receive it in.”
In off-record conversations, a number of private credit fund managers have told Alternative Credit Investor that key man risk is their top concern when it comes to technology. Only the very large investment houses tend to have a dedicated CTO or equivalent executive who has full oversight over the firm’s tech processes, and a team of potential successors. For
the medium-sized and boutique outfits, it is simultaneously a job for everyone and for no one. Everyone who is involved in the day-to-day life of a private credit fund must be able to use the same technology processes, and this can create an inefficiency in and of itself. After all, experienced portfolio managers are not hired so that they can spend hours reformatting key data points across multiple systems.
“Every single company in the world should have someone dedicated to technology,” says Versana’s Sachs.
“In my mind, it's a must. We're sitting in a technological age. There are so many new technologies coming out every day. Technology is what's going to enable private credit to scale and actually grow. But it absolutely has to be front and centre for them to be able
to grow their businesses.”
However, for firms who do not have the resources to appoint a dedicated CTO, outsourcing can be a favourable solution.
“Outsourcing means investment managers don’t need to make the same level of investment in technology because the initial and ongoing software and associated
resource costs are absorbed by the outsourcing partner,” says Hogan.
“Equally, the arrangement allows managers to concentrate on the investment management side of the business rather than the back-office admin, provided they have appointed a reliable administration partner.”
Alternative fund managers understand the value of datadriven technology. You only have to look at BlackRock’s £2.55bn purchase of Preqin for evidence of this. The asset manager plans to combine Preqin’s data and research tools with its own investment technology to
Warburg Pincus has struck a strategic partnership with Aztec which will make it both a minority shareholder and key client of Aztec.
“Technology will continue to become a more important part of the value proposition of private credit companies,” says Northleaf’s McKeown.
“I think that technology change will go slower than expected, but then it will go much faster than people expected at the same time, which I guess is a way of saying it's probably going to go in fits and starts.”
Right now, we seem to be in the faster stage of technology growth.
“ Technology is what's going to enable private credit to scale and actually grow”
create a new private markets technology and data provider.
Since then, there has been a flurry of tech-related investment activity in the sector. Barclays has become the latest subscriber and investor in Versana’s next-generation platform, and Guggenheim Investments has begun the process of onboarding Allvue Systems’ technology to streamline its private debt portfolio. Meanwhile, private equity firm
Fund managers are actively investing in technology integration and prioritising the streamlining of key processes – often with the help of a third party. With billions of new dollars pouring into the private credit sector each year, the time is right to finesse these back-office processes so that fund managers can focus on doing what they do best –originating good quality loans and keeping their investors happy.
Navigating the future of private credit through local expertise
Zach Lewy, founder, chief executive and chief investment officer of Arrow Global, explains the value of country-specific strategies
REFLECTING ON THE growing landscape of private credit, I am struck by the pivotal role that local expertise plays in navigating this evolution. Over the past few years, we've seen a significant change in how investors approach credit, particularly in a macroeconomic environment characterised by higher-for-longer interest rates and evolving regulatory frameworks. This paradigm shift is not just a passing trend; it represents a fundamental realignment of priorities and opportunities in the financial markets.
As part of this transformation, the growth in private credit assets under management (AUM) has been significant. This growth shows no sign of slowing with Preqin forecasting that private debt AUM will grow at a compound annual growth rate (CAGR) of 11.1 per cent from 2022 to 2028, reaching an all-time high of $2.8tn – almost doubling the 2022 figure of $1.5tn. When interest rates were zero or even negative, the investment landscape was very different. If someone had told investors they could earn a 5.5 per cent risk-free return from government bonds, most would have jumped at the chance. Those days of ultra-low rates, however, are behind us. Today, investors are drawn to credit not only because of the
higher yields but also because they can secure a top position in the capital structure – a position that is inherently attractive in a still uncertain economic climate.
The shift away from traditional assets in real estate equity, particularly underperforming office assets, and even from private equity, is reflective of a broader recognition that credit offers a more secure and often more attractive opportunity. The lure of holding a senior secured position, where you're being compensated well for the risks involved, cannot be overstated. However, seizing these opportunities requires more than just capital; it demands a deep understanding of local markets, regulatory environments, and economic trends.
The influx of capital into private credit has intensified competition, but the real question is not just about the amount of money flowing in – it's about the value you can extract from that capital. This dynamic is clear in the mass mortgage market, where large operations are focused on long-term profitability by getting homeowners on their books. Yet, for these lenders to make a significant impact on private credit, particularly in the more granular and operationally intensive segments, it will take time – and potentially low interest rates. It also
requires a willingness and capability to manage operationally intensive assets on their balance sheets.
In contrast, our approach at Arrow Global has always been grounded in utilising local expertise to navigate complex sectors. Whether it's asset-based or real estate credit, the importance of understanding the complexity of each local market cannot be emphasised enough. In Europe, for example, asset-based finance is complicated by the need to operate across 44 heterogenous country regimes, each with its own legal, tax, and regulatory landscape. This is why 99 per cent of asset finance in Europe remains domestic – cross-border securitisation, while common in the US, is far more challenging here. But this challenge is also an opportunity for those with the right local knowledge. By focusing on country-specific strategies, we can unlock value that others might overlook.
Similarly, in real estate credit, the opportunities are significant but not without their complexities. Real estate debt is inherently more challenging than corporate debt due to the need for significant local expertise. The simple question is would you rather lend against a corporate entity at four to five times earnings or against real estate with a conservative 60 per cent loan-
to-value ratio? For me, the choice is clear. However, executing this strategy requires not just capital but also a robust local presence. We've made significant strides in this area, most recently acquiring key players like Amitra Capital in Spain and Interboden in Germany, building on the foundation and expertise we have developed through our earlier acquisition of Maslow Capital. This strategic expansion, coupled with securing substantial capital commitments, is not just about growth; it's about building a franchise that is deeply integrated into the local markets we operate in.
The political climate in Europe is another factor that cannot be ignored. The shift away from the political consensus that central banks should make mortgage costs cheaper and facilitate greater access
to housing is a game-changer. With expansionary fiscal policies in the US and much of Europe, the pressure on central banks to act as a force of restraint will only increase. This will make owning assets more expensive than it was for previous generations, and this risk needs to be seriously considered in any investment strategy.
In this environment, private credit is evolving rapidly. It's no longer a niche market; it's becoming an established asset class with its own set of standards, benchmarks, and best practices. Yet, this evolution is still in its early stages. Just as the stock markets have been the subject of ongoing debates about the merits of active versus passive management, so too will private credit be debated. Should we offer more liquid credit options? Should
we develop indices that track the performance of private credit? These are questions that will shape the future of the industry.
But while these macro-level trends are important, success in private credit ultimately comes down to scale, expertise, and local knowledge. It's not enough to simply follow the trends; you need to understand the underlying fundamentals of each market you operate in. This is particularly true in sectors like hospitality, where the growth of remote work, international travel and lifestyle migration is creating new opportunities, especially in Southern Europe, with a spotlight on Iberia. Financing the development or refurbishment of hotels, resorts, and related infrastructure is just one example of how private credit can capitalise on societal shifts. But to do so effectively, you need a deep understanding of the local market dynamics, from transaction sourcing to operational capabilities.
Looking forward, I am confident that Arrow Global's focus on local expertise will continue to set us apart. Whether we're navigating the complexities of asset-based finance in Europe, expanding our real estate credit portfolio, or exploring new opportunities in emerging sectors, our success will be driven by our ability to understand and respond to the unique challenges and opportunities of each local market. This is not just a strategy; it's the core of who we are and how we operate. And as the landscape of private credit continues to evolve, I believe that those who can combine global vision with local execution will be the winners.
European Investment Fund: Backing sustainable development
Francesco Battazzi explains how the European Investment Fund is deploying investments to support and develop the green economy across Europe
ESTABLISHED IN 1994, the European Investment Fund (EIF) is part of one of the world’s largest multilateral development banks, the European Investment Bank (EIB). It is also one of the most active investors in Europe’s private credit sector.
As head of the fund’s private credit division since January 2019, Francesco Battazzi is responsible for investments in senior private credit funds specialising in assetbased, senior and unitranche financing to small- and mediumsized enterprises (SMEs) and midmarket companies across Europe.
According to Battazzi, the EIF has made commitments to approximately 170 private credit funds, totalling around €6.7bn (£5.6bn) since 2007. To date, these investments have provided new financing to more than 8,500 SMEs and mid-market companies, primarily within the EU.
“Private credit funds are critical players in the financial ecosystem, offering risk-based, non-dilutive and tailor-made financing solutions that cater to the unique growth needs of businesses, unlike traditional bank financing,” Battazzi explains. “The EIF has maintained a long-term investment approach, continuing to allocate funds during challenging periods, such as the Covid-19 crisis and the macroeconomic turbulence that followed the Ukraine
war, which disrupted allocations to alternative investments”.
Battazzi, who joined the EIF in 2009 as head of analytics and new products before becoming a leading member of the private debt team in 2015, positions the EIF as a leading and unique investor in Europe, which actively supports European private credit funds to grow, diversify, and reach their final close.
“Our participation as a AAArated cornerstone investor in selected funds is crucial for general partners in their fundraising efforts, we encourage other private investors to enter this market,” he says. “In 2022, we invested in 23 private credit funds and around 20 in 2023, despite a challenging fundraising environment where 70 per cent of funds secure only 20 per cent of overall fundraising volumes, according to Preqin data.
“With a long-standing investment track record as a fund-of-funds investor in the lower mid-market, the EIF is well-equipped to offer valuable guidance, especially to new or first-time teams and strategies as well as in new geographies. Investing in pan-European funds and exploring opportunities in emerging regions aligns with our mission, bolstered by our unique expertise across various jurisdictions.”
The green agenda Battazzi says the current investment
strategy sees the EIF invest in around 20 credit funds, with commitments typically ranging from €20m to €40m. It targets commingled funds that focus on providing risk financing to SMEs and small mid-cap companies.
The EIF's geographical scope is limited to Europe by statute. Specifically, to the member states of the EU, candidate countries, potential candidate countries, and European Free Trade Association countries.
In its private debt investment activities, the fund encompasses a range of strategies, including classic senior debt, unitranche, growth debt and asset-based financing, as well as subordinate and hybrid debt-equity instruments, primarily under the InvestEU programme which aims to mobilise €145bn in investments.
“While generalist investment strategies are essential for a competitive capital market, the EIF has increasingly focused its allocations on specialised fund managers,” Battazzi says. “Acting as an anchor investor, the EIF supports new thematic funds focused in areas critical to environmental sustainability and energy transition.
“A growing portion of EIF investments are dedicated to promoting sustainability and green transition within the European private debt market, with many funds qualifying as Article 9 financial
products under the Sustainable Finance Disclosure Regulation, targeting environmentally sustainable investment objectives.”
These funds typically provide non-dilutive financing for businesses pursuing sustainable green investments or requiring capital expenditure financing for the green transition. In support of these goals, the EIF has established the EIF Climate Action and Environmental Sustainability Criteria, which are designed to foster the transition to a climate-neutral economy.
“These criteria prioritise initiatives that combat global warming, focusing on energy transition, climate adaptation, and mitigation. They serve as the foundation for all EIF investments, guiding expectations at the commitment level and facilitating ex-post portfolio monitoring and reporting,” he adds. “An increasingly important area of interest is innovation, we consider private credit as a means to offer non-dilutive financing options for European cleantech and deeptech companies.”
Battazzi emphasises that the EIF’s private credit activity is
limited to investments in funds.
“In certain instances, these private credit funds originate from peerto-peer platforms, which we refer to as marketplace lenders,” he says. “While marketplace lenders provide a financing channel of critical importance for small businesses, they represent a marginal portion of EIF’s overall investment activity.”
The main reason, he explains, is due to investors’ reluctance to tap into the very small end of business financing. Battazzi says it has been difficult for them to fundraise among institutional investors and reach target fund size.
Venture and growth
Asked what criteria the EIF uses for selecting private debt funds and what due diligence process it employs, Battazzi points to the fund’s 30-year history as a fund-of-funds investor in the European lower mid-market.
The EIF employs a comprehensive due diligence process,” he says.
“Selection is grounded in detailed and thorough commercial, compliance, and legal assessments, considering various factors such as strategy, team, track record, market conditions, and fund terms. This process includes legal negotiations and the implementation of relevant policy objectives, primarily aimed at supporting access to finance for European SMEs and small midcaps, while also addressing other important policy goals related to gender equality, sustainable economy, and market development.”
In terms of where investment is focused, Battazzi says the fund is increasingly focused on supporting the venture and growth debt market, including accelerating innovation and digitalisation, as well as promoting developments in cleantech and agri-food technology.
“In February 2022, the EIF published the EIF ESG Principles, which outline the policies and procedures regarding the consideration of environmental, social, and governance (ESG) aspects in its transactions and operations, focusing on the assessment, management, and reporting of ESG factors,” Battazzi says.
He says these principles are central to the EIF's activities and are supported by various frameworks, including the Sustainable Development Goals (SDGs). The EIF addresses a wide range of SDGs, such as access to decent jobs, innovation and infrastructure, reducing inequality, and combating climate change.
“The EIF maps its contributions to these goals through alignment with the public policy goals, enabling effective monitoring of its support for achieving them. Additionally, the EIF emphasises climate action and environmental sustainability, reinforcing its commitment to sustainable practices.
“It aligns with the Paris Agreements by defining high greenhouse gas emission sectors and restricting financing to these assets unless they meet specific sustainability criteria. An ESG questionnaire assesses management companies' policies regarding climate issues, and those with assets under management exceeding €500m are required to disclose climate-related information following the recommendations of the Task Force on ClimateRelated Financial Disclosures.”
On top of this, the EIF incorporates a climate risk assessment model in its investment decisions, considering both physical and transition risks to guide its choices.
Alternative Credit Awards 2024
The Alternative Credit Awards, hosted by Alternative Credit Investor, will take place on 6 November 2024 at the Royal Lancaster London. The winners of the awards will be announced on the night, celebrating the most influential fund managers, lenders and service providers making their mark on the alternative credit space.
Attendees can expect a glittering evening, comprising a drinks reception, gala dinner and awards ceremony.
Tables:
Table of 10
Bubbly on arrival
3 course dinner
Coffee and petit fours
5 bottles of wine
Still/sparkling water
£5,500 +VAT
Premium table of 10 2x bottles of champagne at the table
Prime position near stage
£6,000 +VAT
Sponsorship
:
We are offering a range of sponsorship opportunities around the awards, for companies looking to gain valuable brand exposure in the alternative credit industry.
Packages can include presentation of an award, on-site branding, dedicated mailers, advertising and commercial content.
For more information on tables and sponsorship, please contact sales and marketing manager Tehmeena Khan at tehmeena@alternativecreditinvestor.com.
The shortlist for the Alternative Credit Awards has been released, recognising the most influential players in the private debt industry.
Climate transition fund manager of the year
Apollo Global Management
SUSI Partners
ILX Management
BNP Paribas
Distressed debt manager of the year
Oaktree Capital
Management
Arrow Global
NorthWall Capital
Balbec Capital
Fund manager of the year
Ares Management
Permira Credit
Federated Hermes
Eurazeo
Fund of the year
$1bn+
Ares Senior Direct
Lending III
Oaktree Special Situations Fund III
Kartesia Senior Opportunities II
Kayne Anderson BDC
Fund of the year sub $1bn
Fintex Private Debt
Eiffel Impact Debt II
TwentyFour Income Fund
Leste Credit Opportunity
Fund
Impact fund manager of the year
Allianz Global Investors
Eiffel Investment Group
BNP Paribas
Eurazeo
Infrastructure debt manager of the year
Macquarie
Edmond de Rothschild
AXA IM Alts
Rivage Investment
Innovative fund $1bn+
Ares Pathfinder Fund II
Audax Direct Lending
Solutions Fund II
Avenue Europe Special Situations Fund V
Pemberton Strategic Credit Fund III
Innovative fund sub $1bn
AxiaFunder
M&G Corporate Credit Opportunities ELTIF
NorthWall European Opportunities Fund I
L&G Private Markets
Access Fund
Junior lender of the year
ICG
Kartesia
Churchill Asset Management
CVC Capital Partners
Lower mid-market lender of the year
Kayne Anderson
Federated Hermes Man Varagon
ThinCats
Market commentator of the year
Oaktree Capital Management
Ares Management
Benefit Street Partners
Churchill Asset Management
Mezzanine lender of the year
Shojin
Fintex Capital
HPS Investment Partners
Goldman Sachs Asset Management
Performance $1bn+
Ares Senior Direct
Lending II
Apollo Diversified Credit Fund
Fasanara Capital Global
Diversified Alternative
Debt Fund
Benefit Street Partners Debt Fund V
Performance sub $1bn
LibreMax Dislocation Fund
Vibrant AMBAR Fund
Fintex Private Debt
Blend Network
Real estate debt manager of the year
LaSalle Investment Management
Blackstone
Precede Capital Partners
Leste Group
Private credit secondaries fund of the year
Coller Credit Secondaries –
Opportunities Fund I
Pantheon Credit Opportunities Fund II
Portfolio Advisors Credit Strategies Fund
Senior lender of the year
Triple Point Private Credit
Pemberton Asset Management
Permira Credit
Ares Management
Special situations debt manager of the year
Arrow Global
NorthWall Capital
Oaktree Capital Management
Tikehau Capital
Wealth market proposition of the year
M&G Investments
Eurazeo
Carlyle
BlackRock
IFISA provider of the year
easyMoney
Kuflink
Folk2Folk
Simple Crowdfunding
P2P lender of the year
Folk2Folk
CrowdProperty
Kuflink
The Money Platform
UK bridging lender of the year (sub-£1bn)
Kuflink
Somo
Shojin
easyMoney
UK property development
lender of the year (sub£1bn)
CrowdProperty
Blend
Relendex
CapitalRise
UK SME finance provider of the year (sub-£1bn)
Folk2Folk
ThinCats
Rebuildingsociety
Compliance service
Vigilant Compliance
Ocorian
Acuity Knowledge Partners
Turnkey Trading Partners
Fund administrator
Aztec Group
BNY
Ocorian
MUFG Investor Services
Socium Fund Services
Law firm – fund structuring
Linklaters
Simmons & Simmons
Macfarlanes
Debevoise & Plimpton
Law firm – transactions
White & Case
A&O Shearman
Dechert
Cahill Gordon
Placement agent
Rede Partners
Campbell Lutyens
Devonshire Warwick
Capital
Stone Mountain Capital
FIRSTavenue
Ratings provider
S&P Global Ratings
Moody’s Ratings
Fitch Ratings
KBRA
Technology provider
Oxane Partners
Broadridge Financial Services
Allvue Systems
Dilligenz AI
Private credit’s tech awakening
IN HIS ROLE AS MANAGING director of portfolio strategy at Northleaf Capital, Jon McKeown has witnessed the remarkable growth of private credit, and the importance of technology in fuelling that growth. He tells Alternative Credit Investor how his team is working to integrate private credit technology in a way that works for both fund managers and their investors.
Alternative Credit Investor (ACI): What technologies are you using day-to-day at the moment as part of your job?
Jon McKeown (JM): In my role overseeing portfolio strategy, my team and I utilise data from across our platform, which means relying on a few different technologies. The key is the portfolio management system – on the private credit side we utilise a system called iLevel, which is provided by S&P. It is a relatively customisable solution that allows you to configure the system to the needs of your particular portfolio and the types of transactions that you are undertaking.
At the front-end, we make use of a process management software to support the closing process for new transactions, from the point where we commit to a transaction through to funding. It allows all the different functions at Northleaf to communicate and exchange information in an efficient manner, in addition to reducing operational risk and providing a repository for historical information.
We also use Salesforce, which started life as a CRM system for Limited Partner relationships but is also used on the ‘money-out’ side in terms of managing relationships
with market counterparties, sponsors, and providers of fundlevel financing, and capturing useful market level data. We then use Power BI to provide dashboards allowing us to make sense of that origination and pricing data.
Like many organisations we also have a data lake where we pull data from disparate sources together, a data warehouse solution which organises that data and produces the current reporting for internal users, and to a certain degree allows people to manipulate the data themselves to answer their own questions, again using a Power BI overlay.
Finally, I would acknowledge that while a focus of recent years has been the migration of core processes away from Excel, this is still a valuable tool for one-off and bespoke analysis, such as modelling the pricing and economics of new fund offerings or conducting certain types of forward-looking scenario analysis.
ACI: What operational challenges are faced by private debt managers today?
JM: The private debt asset class contains a significant amount of complexity due to a combination of the many details that underpin an individual loan structure, plus the detailed financial data that we receive from our borrowers as part of our asset monitoring processes. Add to this the customisation that is undertaken to meet the needs of both borrowers and investors. The big challenge, to my mind, is to create a process that is repeatable, and which can handle the large amounts of data that we work with, while also accommodating the variations
that result from customisation. You could think of it as being a little bit like if you had a car production line and you are mass producing Ford Model T's. But then you've got these exceptions to the rules. Someone wants it in a different colour, or they want a different feature or a different chassis entirely. We are trying to include all that customisation. There's probably as many different data points as there are parts in a motor vehicle.
ACI: How is AI being used in private credit?
JM: On the whole I'm excited about it. Northleaf has trialled a couple of different AI solutions, and we have already seen some modest gains for our junior investment professionals. There are two big gains that I see in AI – one is the efficiency on the investing side, where the team is looking at individual transactions. AI has shown the ability to ingest and provide an initial synthesis of one or more initial documents, which the junior investment professional can then augment with additional analysis and insights before providing a deal screen for broader review. AI addresses more of the ‘grunt’ data work, allowing the analyst to focus on the ‘so what’ implications.
And then secondly, at the portfolio level, AI offers the potential to access and look at a broader array of data and synthesise it to develop insights, which aren't going to tell us what to do, but are going to help inform questions that we have, give us greater conviction in certain directions that we might go or prompt new questions that we perhaps haven't thought about.
This is an exciting path to explore, but one that is at an early stage.
ACI: Is there a willingness within the private credit sector to share data?
JM: It makes a lot of sense to be able to pull data from across a broader array of providers and then have a third party aggregate that data to provide a comprehensive index. You do see individual platforms providing their view, but I think that it would be a great industry initiative to do so in a more comprehensive manner. The challenge, of course, is a classic economic one of how to encourage sharing that increases overall utility, despite the incentives to protect
what is viewed as proprietary data. But who is to say that private debt can’t overcome these impediments, given the quantitative and data-driven nature of the business, and the value of that data to all market participants?
ACI: What keeps private credit CTOs up at night?
JM: I can’t speak directly for CTOs, but from my seat, the main thing is ensuring we keep building the right capabilities within the team. That means more of what you might call biathletes – people who understand the investment and capital raising process well enough to participate in defining our key questions, but who also have the coding skills
and ability to evaluate third party solutions that will provide the tools that help us answer those questions..
ACI: What are your predictions for the future of technology and private credit?
JM: The progress we've had in terms of computing power and now AI does fundamentally raise the ceiling of what is possible. But there's a large gap between potential and actual realisation. And part of the effort to close that gap will be in terms of the technology choices that organisations make, their success in implementing technology projects from a hardware point of view, getting the right system, and customising it to the business.
But there's a very large part of that value realisation mobilisation story, which is to do with organisation design, change management, and education of the broader team. So as important as it is to make the right decisions and have the right people in the core technology roles, it's probably going to be even more important to be thoughtful about the design of how this then integrates to business processes and, critically, how it integrates to decision making. Ultimately, you want to put the power of the technology in people's own hands so that they can be using Power BI or whatever else it may be to answer their own questions.
Our clients quite understandably see us as black boxes, or at least semi-opaque ones, and they want transparency. So, what we are building for internal purposes, we are going to have to extend over to the client so that they can have visibility into what we are investing in on their behalf. And that will give them more assurance, more confidence, and will also allow them to make better decisions at their level.
Bridge the Gap
Don’t accept disconnected loan reporting and accounting data...
in Fund and Corporate Services
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Don’t accept disconnected data... in Fund and Corporate Services
The results? Information on demand, data you can trust and real time decision-making. And with our dedicated team of private credit professionals by your side, you’ll have specialist expertise you can call on every step of the way.
To find out more visit aztec.group/private-credit