In this blog, I look at the rise of private credit and Cognizant’s operational services that are tailored to meet the needs of the private credit industry.      

The Rise of Private Credit

The creation and availability of alternative assets such as crypto, private equity, tokenized assets, and tangible assets, is expanding much faster than the overall investment market. Indeed, changes in regulations are accelerating the adoption of crypto, notably in the U.S. Managing these assets presents different challenges to custodians and asset managers than traditional asset classes.

The largest, fastest-growing alternative asset class is private credit. It has grown in real terms from $49 billion in 2000 to $1 trillion in 2023, according to the Boston Federal Reserve Bank. Market growth has been accelerating since 2019, and Prequin has forecast that the market will reach $2.6 trillion by 2028, with a growth rate of over 20% per year. This level of explosive growth has prompted regulators to take notice and initiate discussions about prudential risk management to ensure market stability.     

Private credit presents different risk and management challenges than the traditional consumer credit products provided by conventional lenders. Private credit is provided by non-bank lenders primarily to commercial borrowers. This presents the following operational challenges:

• Borrowers are more complex credit risks requiring rigorous analysis and monitoring
• Lenders have less experience with the borrowers and a smaller operational footprint to deliver all processes
• Private credit often utilizes new deal structures to address borrower operational needs. These deal structures are typically not used by conventional lenders
• The lender (owner of the loan) is often different from the agent (originator and servicer), which necessitates clear and disciplined communication.

The difficulty in addressing these operational challenges is expected to increase when the economy deteriorates, interest rates rise, and individual industries enter cyclical downturns. Hence, private credit lenders are addressing their operational delivery needs by collaborating with technology and BPS providers to enhance the flexibility, scalability, and rigor of their lending activities. Cognizant’s capital markets division offers operational services tailored to meet the needs of the private credit industry.      

Cognizant’s Private Credit Operational Services

Cognizant provides three groups of services depending on how the client approaches its operations delivery. They are:

• Operations and research services for clients who externally source BPS services, such as investment operations, credit/investment research, accounting services, and performance management 
• Digital and transformation services for clients who externally source project management and point solution implementation, such as change management, project management office, process excellence, and custom solution implementation
• Technology services for clients who internally deploy technology but externally source maintenance services, such as platform upgrades and application/technology infrastructure maintenance.   

Processes supported include:

• Data management and pricing
• Trade processing and treasury management
• Fund accounting
• Reconciliations
• Performance attribution 
• Reporting
• Investor services.

Services typically start with fund accounting, cash/trade management, and/or reconciliation. The client will eventually expand its engagement to include investment operations and treasury management. Lenders have been slow to adopt credit research services; however, advances in GenAI are increasing the demand for these services. 

Third-party provisioning of operational services for private credit works because the industry's volumes are rapidly growing at over 20% per year, while individual lenders have much larger fluctuations in processing volume due to the buying or selling of portfolios. At the individual loan level, executing these processes is very complex due to the idiosyncratic nature of commercial lending. Calculating cash waterfalls, extracting data from custom documents, attributing performance, reconciling, capital calls, and conducting daily settlements require a combination of domain knowledge and AI to deliver cost-effective, accurate results within deadlines.

Client Case Study: Credit Investment Group

Cognizant has been able to save clients thousands of man-hours of processing time across hundreds of private credit portfolios, while increasing accuracy and enabling clients to scale up/down operations as portfolios are purchased and sold. One such client is a credit investment group, for whom Cognizant provides governance and oversight of fund administration for 152 portfolios with $56 Bn in AUM. Processes supported by Cognizant include corporate actions reconciliation, daily cash reconciliation, and portfolio performance summary. 

Benefits achieved for the client include:

• Automated data extraction from trustee reports: annual savings of 1,000 work hours 
• Intelligent automation of daily P&L tracking updates across 52 funds: annual savings of 450 work hours 
• Low-code automation of daily cash break analysis: annual savings of 300 work hours
• Automated reconciliation of PCO cash balance preparation using trustee data: annual savings of 250 work hours.

Cognizant uses Fintech tools to deliver faster processing in investment operations, such as:

• Canoe for document management: to automate document collection with APIs and RPA. It employs AI/ML to analyze data and generate valuations
• Vidrio for managed data services: to track risk exposure across asset allocations
• Chronograph and I-level for portfolio management: to create a unified view of cash flows
• Alleryx for automations: to automate cash reconciliation and prepare capital calls
• Workflows for control and audit: to implement fund administration processing on the Pega platform.

These tools enable better orchestration and analysis across complex alternative asset portfolios and processes.  

Summary

Cognizant’s operational solutions for the private credit industry enable lenders and asset managers to address their two most significant challenges: providing flexibility to scale operations quickly, matching large swings in processing volumes and providing reach to orchestrate policies and procedures across large numbers of heterogeneous assets and portfolios. Cognizant employs advanced technology to pull, analyze, and report on relevant data from custom documents. This is ahead of the market, which is mostly experimenting with the best way to address these challenges. Cognizant will be able to apply best practices and use cases from private credit to other alternative asset classes to accelerate intelligent automation of the industry’s operations.