The Private Debt Opportunity for Fund Administrators

October 18, 2022
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The private debt market is booming. Data from McKinsey shows that total private markets fundraising grew by a CAGR of 19.7% between 2020 and 2021. Of this, fundraising for direct lending grew by 65.0% and venture debt grew by 40.3%, muscling into the private equity and venture capital markets. Increased buyout valuations, investor interest in high current income, and founders who want funding without dilution are all driving the demand.

This debt issuance creates a big opportunity for fund administrators. More PE managers are getting into the market, so the fund administrators capable of helping their clients manage an expanded portfolio will have a competitive advantage. This is essential in a space as competitive as fund administration, with more administrators adding services through mergers and acquisitions.

In this article, we look at the growth of private debt as an asset class, how debt has become a part of many fund administrators’ clients’ portfolios, and the opportunity that this creates for private equity fund administrators that understand the complexity of debt markets.

READ OUR PRIMER: WHAT IS PRIVATE DEBT?

Private debt holds a growing share of a growing private capital market

Over the past two decades, private markets fundraising has attracted an increasing amount of funding worldwide. Despite fundraising dips during the earliest days of the COVID-19 pandemic, allocations have continued to grow after those market resets. Two segments of the private debt market have shown particularly strong growth: direct lending, which showed a CAGR of 65% between 2020 and 2021; and venture debt, with a CAGR of 40.3% from 2020 to 2021. Chart showing global private debt fundraising from 2010 to 2021

 

Asset allocators like debt because of its steady return, while founders and management teams like it because it reduces their dilution. As the market grows, so will the need for administrators that understand the sector.

Private and venture capital are now often a mix of debt and equity

The demand for debt is reshaping private corporate finance. Equity managers increasingly find that they must offer debt as part of their purchase or investment. The number of deals and values in the US showed a general upward trend between 2015 and 2021, and the data for the first half of 2022 shows that the sector is holding its own.

 

Graph showing US venture debt activity for tech startups, 2015-Q2 2022

 

Mature companies looking for additional private-market funding are also turning to debt. Axios reports that direct lenders completed 22% more deals in the first half of 2022 than in the first half of 2021. The trend in increased direct lending is happening alongside a decline in the traditional leveraged loan transactions put together by commercial and investment banks.

This is remaking the markets—and remaking the fund administration client base in the process. Private equity and venture capital firms will be managing new assets. As a result, they may merge with debt managers or start their own debt funds. All of this creates an opportunity for fund administrators to support their growth.

Chart showing the value of US leveraged loan and direct lending deals, 2021-2022

 

The need for administrators is significant

The private debt market is growing, and with it the need for private debt administrators. Between fund company mergers and market shifts that favor debt in dealmaking, more venture capital and private equity funds need assistance managing their credit holdings. Allvue’s Investment Accounting credit solution works with the same chart of accounts and general ledger as Allvue’s Fund Accounting equity solution. The two are fully integrated so that data flows seamlessly between them. A single system managed multiple asset classes in multiple currencies, giving your clients a holistic perspective on their portfolios.

Adding private debt services is a way for fund administrators to grow with their customers. Allvue offers front-to-back services for administering debt and equity investments and investment partnerships. Fund administrators looking to expand into debt services should look to Allvue for the expertise needed to get started.

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