• Nate Eisenberg, Product Manager - Credit Markets at Allvue


• 14.01.2025 12:00 pm
#Predictions2025 #CreditMarkets

The growth of private credit as an asset class, including the recent rise of private credit Exchange-Traded Funds (ETFs), tokenized funds and other liquid vehicles, is extending beyond traditional institutional and high net worth investors to reach the retail investor market. As these funds gain traction among investors seeking exposure to private credit without the barriers of direct investments, fund managers will be focused on addressing several inherent challenges to illiquid assets in liquid funds. Some of these challenges include valuation risks—such as opaqueness, thin markets, and the non-standardized information relative to liquid asset classes, the need for robust investor reporting, and initial capital deployment. The increasing use of credit risk estimates, particularly where formal ratings are unavailable, will be critical in providing investors with the transparency and tools needed to navigate this evolving landscape.

Private credit investments involve complex and often opaque information, making standardized reporting challenging. There is pressure to provide detailed and consistent insights on performance, risk metrics, and compliance. Investors expect a high degree of transparency, especially given private credit's oftentimes higher-leverage nature. The growing demand for private credit ETFs will likely prompt the development of specialized reporting frameworks to meet these transparency needs.

Unlike institutional Limited Partners (LPs), retail investors' capital must be funded upfront, which pushes fund managers to deploy capital quickly to avoid a drag on returns. This poses another layer of complexity as fund managers may need to decide whether to deploy capital into public securities initially or find other ways to manage the timing of investments. It remains uncertain how fund managers will address this challenge.

We can’t forget about technology in the current landscape. While AI continues to be a transformative force across industries, the investment management sector will continue to take a measured approach in 2025, particularly with Generative AI (GenAI). There will be a focus on continuing to implement reporting automation in the coming year, while also setting the foundation for how sophisticated AI can be meaningfully incorporated into products and services. According to Allvue Systems’ GP Outlook Survey 2024, 42% of General Partners (GPs) have yet to adopt AI or machine learning but plan to do so within the next two years. Thirty-four percent have no current plans for AI adoption.

The measured pace of AI adoption reflects the need for tech partners who understand the nuances of fund operations and regulatory requirements. The complexity of fund operations and the unique data demands of private markets mean that effective AI solutions require flexible design. AI’s role will be one of exploration and dialogue, with fund managers assessing providers and building an understanding of how the new technology could enhance data analysis, risk assessment, and reporting.