Amid a period of rapid growth in credit and private debt investment strategies, BNY Mellon has established a position as a key partner to fund managers who have had little time to standardise, invest in technology, and automate manual processes. Megan Gentilesco, the company’s Global Head of Private Equity and Credit Fund Services, chats to Private Equity Wire about some of the current challenges and opportunities in the space…
PEW: How are current economic conditions affecting the private credit market?
The rapid expansion of the Private Credit Market continues, albeit tempered by recent interest rate and fundraising activity. The current economic conditions present both challenges, and significant opportunities within the private credit markets.
Investor interest in private credit funds remains strong – it is one of the largest asset classes driving the growth of “registered alternatives.” In fact, a recent survey by BNY Mellon of traditional and alternative asset managers revealed that 43% expect to increase their firm’s offerings of private credit over the next one to two years .
Although raising interest rates have led some borrowers to re-evaluate their credit needs, the recent turmoil in regional banks in the US reinforced the importance of non-bank lenders, further bolstering the opportunity set for Private Credit managers. Raising interest rates have led some borrowers to re-evaluate their credit needs, either postponing or downsizing their asks.
PEW: What are some of the biggest challenges being faced by private credit funds currently?
In the last three years, the private credit market has grown from approximately $875bnto $1.4tn . Many managers are reflecting on their infrastructure, technology and operating models and how these can be future proofed for continued growth. These models are further tested as managers continue to expand into new domiciles and credit strategies,
often requiring new expertise, new technology or even local presence in certain domiciles; at a time when nearly all managers are struggling to launch new product quickly and seamlessly. At BNY Mellon, we’ve seen rapid growth in our private credit client base as managers turn to a third-party administrator to provide scale and expertise across domiciles and strategies.
PEW: What opportunities do you see emerging for private credit firms in the near future?
Top of mind for many managers is increasing their distribution to reach largely untapped investor markets such as high net worth, retail and defined contribution investors. For many managers this means introducing liquidity into private credit funds that might have typically been closed-ended. Moving to an open-ended model often generates other changes, particularly adjustments to management and incentive fees or, in some cases, movement to a management fee only model.
Managers are also utilising various distribution channels, such as private banks and wirehouses to reach this new investor base. Working with these partners often presents new administration and reporting requirements. Additionally, some managers are launching retail or “retail like” funds such as Interval Funds, ELTIF, LTAFs, BDCs, SICAV Part II Funds, and others. These managers need to consider a new world of requirements including regulatory filings, enhanced compliance requirements, etc.
In these cases, the knowledge and capabilities an experienced third-party administrator and transfer agent can provide can be of great benefit.
PEW: Are there ongoing or planned regulatory shifts for private credit firms to be mindful of?
We are having many discussions with clients about the new SEC Private Funds Rule. There are many components to this regulation but three are raised frequently – increased reporting requirements; new guidance on performance reporting and new limitations on preferential treatment of select investors. We are seeing managers begin to prepare for these new regulations even as the rules are being challenged in court by various industry bodies.
In addition, ELTIF 2.0 and the revised AIFMD to be implemented may bring enhanced distribution channels and revised reporting requirements. We have been speaking to private credit managers regarding the impact of AIFMD II and liquidity mechanisms for open-ended funds.
PEW: What can firms do to position themselves for these changes?
Managers should review and re-evaluate their data strategy, considering transparency as well as the opportunity to enhance their performance reporting at the asset, fund and investor level. To support this, we are seeing many firms look to outsourcing their regulatory reporting. Our recent survey revealed that 65 % of managers have plans to begin or expand their outsourcing arrangements .
We are seeing many clients considering a data warehouse and evaluating their oversight strategy. Can they use a data warehouse to oversee third party administrators more effectively and efficiently? Can a data warehouse help them manage multiple operating models – self-administered, outsourced, etc? This is another area where an experienced service provider can provide valuable insights.
Megan Gentilesco, Global Head of Private Equity and Credit Fund Services, BNY Mellon – Megan has responsibility for the Global Credit and Global Private Equity businesses, working with both general partner and asset owner clients to deliver tailored solutions for their needs as managers of – and investors into – private credit and private equity funds. Working closely with technology and operations colleagues, Megan drives product enhancements and new product developments based on client, market and business needs. Megan has over 15 years’ experience in the alternative investment industry, including expertise in private equity, credit, real estate and hedge fund administration, as well as portfolio administration for asset owners. Prior to joining BNY Mellon in 2016, Megan worked at JP Morgan in London and New York as a senior product manager within the Alternative Investment Services group, with particular focus on the accounting and administration of private equity and hybrid credit funds. Megan holds a BS in Applied Economics from Cornell University and an MBA from the London Business School.
