Transformation of private credit sector driven by digital technology

By Christoph Gugelmann, Founder & CEO of Tradeteq

The boom in private credit over the past decade and a half is showing signs of fatigue as the market has started to mature, bringing to light structural issues including operational challenges for banks and alternative lenders, which sell such credit on to investors that are beginning to inhibit the sector’s growth.

Long considered an asset class with enormous potential, the private credit market experienced extraordinary growth driven primarily by new regulations put in place in the wake of the 2008 financial crisis, which made public credit harder to access – particularly for smaller corporates unable to afford the higher compliance costs. The private credit market grew from a total value of $250 billion in 2010 to $1.4 trillion by 2023.[1]

Private credit is an alternative asset, sometimes referred to as direct or non-bank lending, and includes products such as investment-grade private placements, real estate debt, and venture capital loans. Growth in the sector has attracted big traditional players to it. BlackRock recently purchased one of Europe’s largest private credit lenders Kreos Capital[2], while the UK’s largest corporate pension fund, BT Pension Scheme, is now investing heavily in the sector.[3]

However, private credit products can still be elusive for numerous institutional investors owing to the inherent challenges in transferring such instruments. To cater to a diverse range of institutional investors, there’s a need to repackage them into tradeable and clearable formats. Furthermore, managing extensive pools of granular instruments, such as receivables, can be operationally taxing.

This is where tech, such as Tradeteq’s workflow automation and repackaging services come into play, minimizing frictional costs and facilitating smoother transactions between institutional investors and asset sellers.

Removing operational hurdles

The usual process within the private credit primary market is for these products to be packaged and sold by banks to institutional investors, including pension funds, mutual funds and insurance companies, and family offices. The banks are typically eager to offload these products to reduce their capital requirements and allow them issue more such credit.

However, this process is often easier said than done. These private credit products are seldom organised into easily clearable tranches, which can creates operational difficulties. Banks, particularly smaller ones, may not have the infrastructure to hold and sell such instruments. This duly adds to the cost, thereby reducing investor appetite.

These operational difficulties have wider consequences. Significantly, they reduce liquidity in the private credit market.[4] The time and resources needed to process these transactions between banks and investors stymies the free flow of capital, thereby discouraging participation.

Given the increasing size and importance of private credit, the aforementioned problems act as a drag on the capital markets more broadly. Banks’ difficulties in clearing their books of these assets make it, in turn, harder for them to finance new borrowing or meet ongoing investor demand. That in turn has a trickle-down effect on the wider economy.

Using digital technology to reduce latency

Cutting latency in the process is critical. To help address bottlenecks and other challenges currently faced by both banks and investors in these sector, while also reducing costs, digital technology clearly has important part to play.

To meet the needs of a diverse range of institutional investors and to facilitate the processing of transactions, these instruments need to be repackaged into tradable and clearable formats. It’s not a new concept, but what is new are Tradeteq’s workflow automation and repackaging services. These tools minimize frictional costs, enabling smoother, faster and cheaper transactions between institutional investors and asset sellers.

Moreover, Tradeteq’s online platform allows users to broadcast their offers, track negotiations, analyse their portfolios, and automate legal documentation and asset selection. It also offers a number of ancillary services to sellers, such as introductions to investors, guidance on market positioning and operational support.

The online platform enables banks and investors to readily find one another, foregoing the need for specialised brokers – and their fees. Automated legal documentation and operational support also allow smaller corporates to engage in the private credit market, because the compliance element is largely outsourced to the platform itself, again helping to reduce cost.

Such innovation is beneficial to the wider private credit market, as the seamless repackaging of instruments reduces costs making market participation more attractive. That in turn boosts liquidity.

Private credit will continue to grow robustly, making it ever more important to the global economy. To continue that smooth upward trajectory, a seamless platform, like Tradeteq, will play an essential part.

[1] https://www.vistra.com/insights/private-debt-trends-whats-driving-market-now#:~:text=The%20numbers%20behind%20the%20private,of%20%242.3%20trillion%20in%202027

[2] https://www.ft.com/content/cb47f61b-6c6c-45bd-9cd0-df344e7aa73f

[3] https://www.ft.com/content/d28ce3b9-f830-46a6-9ece-9f5f4e933c56

[4] https://www.nb.com/en/global/insights/insights-rethinking-the-credit-liquidity-continuum