Are you prepared for increasing demand for customized investment structures and greater liquidity?
Recent private credit fund manager research conducted by the Alternative Credit Council and Dechert LLP has revealed a number of significant trends driving change in private credit fund structuring. The study found that 80% of respondents manage capital through a combination of commingled funds and other vehicles. While these commingled structures remain popular, 95% of managers say they now offer managed account structures for single investors, with SMAs being available at a range of allocation levels. Although 44% of respondents stated that they are only able to offer managed account structures for $100 million+ allocations, 51% of respondents offer managed account structures for single investors below $100 million, indicating that there is a high degree of willingness to consider such structures at lower allocations.
While maintaining these structures entails greater costs for private credit managers, there is growing investor demand for tailored investment structures. Private credit managers acknowledge that it’s strategically important to be able to meet this demand.
Liquidity is another area of product design where practices are evolving: 48% of respondents expect investor demand for liquidity to increase. These demands can be met with continuation vehicles or fund structures such as evergreen or hybrid structures (typically combining elements of open and closed-ended structures). These structures offer benefits to both investors and asset managers. For investors, these structures can provide important efficiencies that improve their returns (for example, by permitting investors to remain fully and continuously exposed to the strategy over a longer period) and offer them more control over their capital allocations to private credit strategies. For asset managers, well-designed evergreen structures help strengthen their relationships with investors and provide them with a more permanent and renewable source of capital to pursue their investment strategies.
Key Issues To Consider Now
- There is no one-size-fits-all approach to private credit fund structuring – managers need to be prepared to offer investors customized way to execute their investment strategy.
- Evergreen/hybrid structures can be an attractive solution for both investors and asset managers alike but any liquidity and flexibility that can be offered remains limited by the liquidity profile and ease of exit from the underlying asset.
Many managers expect to see an increase in investor demand for liquidity
Footnotes
Based on insights from a survey of 40 private credit managers and a series of one-on-one interviews with private credit managers across a broad cross-section of jurisdictions and representing an estimated US$800 billion private credit assets under management.
