PARTNER CONTENT
From partnering with clients who provide unsecured financing to small and mid-cap corporates, to those taking asset backed positions in real estate and infrastructure, Aztec Group delivers outsourced solutions to a number of leading private credit fund managers. Aztec Group Head of Private Credit, Kevin Hogan, and Luxembourg Head of Private Credit, Francesca Raffa, outline some of the challenges and opportunities in the space and how technology is a key enabler in the private credit space.
How are current economic conditions affecting the private credit (PC) market?
Money is tight, spending is low, and businesses of all kinds are suffering. This is the result of Global Central Banks raising interest rates to their highest levels in 15 years to control inflation. Experts think that rates may remain high for a long time. This creates an uncertain market for investors, adjusting to the new reality.
PC is an alternative way of funding that offers attractive benefits to both Private and Institutional Investors, such as stable cashflow, security and high returns. In today’s market, PC may even outperform other private asset classes.
What can PC funds do to differentiate themselves in an increasingly competitive market?
PC funds are attractive to borrowers and to investors looking to diversify their portfolio in a turbulent market. Their advantages include:
- Ability to renegotiate the loan terms to reduce cash requirements
- Having direct access to the borrower’s management and cashflow information
- Offering higher returns as interest rates rise, since they use a variable market rate plus a spread
- Closed-ended structures that provide funding certainty and avoid forced liquidations
What role does technology play here?
Technology is a key enabler for PC in a volatile and uncertain market, as it helps investment managers (IMs) achieve better returns and flexibility for their investors. PC has grown and diversified over the last 15 years, but it also requires complex and timely back-office management.Â
Technology can simplify and automate these tasks, such as collecting and processing loan information, modelling loans through the life cycle to predict cash flows and returns, generating reports and providing automated data extracts.
Using the technology advances available, at Aztec we now provide clients with daily, accurate and value enhancing data – streamlining both our own processes and theirs, while freeing up IMs to focus on their core activities.
Is default risk on the rise due to inflation and recessionary pressures?
Businesses that rely on debt to fund their activities are facing a tough challenge. Interest rates have gone up, making it harder to service their debt and stay solvent. They need to have enough cash on hand to cope with the changing market conditions. This means that new deals will have to be less leveraged to attract investors. We will likely see companies restructuring and lowering their debt-to-equity ratio to show they can manage their cashflow demands.
If yes, what steps are firms taking to mitigate these risks?
While heavily leveraged businesses can benefit from substantial capital and the benefits this brings, this results in an increased risk of default, particularly when the market is unpredictable and rates are higher. Companies can still mitigate against these risks by focusing on disciplined investment structuring. Paying attention to covenants and liability caps in private loans, agreed between the borrower and lender, will largely influence both the risk appetite and exposure to losses in the event the borrower defaults.
The difficulty for these companies is that such an approach is inherently dictated by the current market conditions and outlook at the time deals are entered into. This may result in portfolios that are unsustainable and no longer fit their target investment strategy. We have seen some managers investing in PIK options, which may historically have been considered a red flag, but in the current high interest rate environment is considered an acceptable tool to restructure certain investments.
Kevin Hogan, Group Head of Private Credit, Aztec Group – Based in Ireland, Kevin leads on the growth and development of Aztec Group’s private credit offering and has Group-wide oversight of the delivery of fund services to Aztec’s private credit clients. This involves working closely with teams in each jurisdiction to ensure clients’ needs are met, bringing a seamless approach to working with Aztec so that they can focus on implementing their own strategies.
Francesca Raffa, Luxembourg Head of Private Credit, Aztec Group – Francesca oversees a broad range of the Group’s core outsourcing activities across its Luxembourg private credit client base, including fund launches, investor onboarding and client communications. She also plays role in the ongoing development of the Group’s private credit strategy.
