Private credit has always understood transparency as a question of disclosure. How much information to share with LPs, and how often, came down to a negotiation between a manager and a small number of investors, with the balance of power historically on the side of the GPs. Some managers shared more than others, but those that were most heavily oversubscribed felt little obligation to reveal granular detail on their loan book.
It’s well reported that that balance is changing. Increasing flows, the move to democratize private credit to individual investors, and signs of market distress, have drawn the attention of global regulators, who are seeking to protect investors’ interests by shining a light on how private credit managers operate.
Responding to that challenge, however, won’t come easily to an industry that has grown up using largely manual processes. Many firms are finding that the challenge of transparency is more of an operational headache than it ever was a compliance one.
Regulating for transparency
In May, the Financial Stability Board published its assessment of vulnerabilities in a market estimated to have grown to as much as $2 trillion. Its main criticism wasn’t actually anything to do with credit quality – it was the lack of information on which to judge that credit quality. Metrics and definitions varied across jurisdictions. Fund- and loan-level disclosure was patchy. Valuations were irregular and open to interpretation. Its central recommendation to national authorities was to close those gaps.
In Europe, under AIFMD II, managers will report on every asset in a portfolio rather than the largest five, with ESMA’s template due in April 2027. In the UK, the Bank of England’s system-wide exploratory scenario has drawn in 46 private markets participants and is due to conclude early next year. In the US, banking regulators already require loan-level disclosure of bank exposures to non-bank lenders.
The operations challenge
In order to meet these obligations, credit firms need to make sure they are capturing a far higher volume of data than they have in the past, which puts the challenge squarely in operations.
The barrier many firms find is that the market has roughly tripled in five years, and back-office reconciliation processes have had to scale on the fly. Many are still working from manual processes, in some cases eyeballing positions line by line with no automated matching. That also introduces a significant amount of key person risk in the ops team, where spreadsheets are run by a small number of people who would take that control with them if they were to leave.
Updating systems and moving to automated reconciliation is uncomfortable, because it involves changing something that is known and has largely worked up until now.
Valuations are a sign of what is to come
The first area where we are starting to see this tension come to the fore is valuations. Where several lenders are marking the same loan, inconsistencies become apparent – and as portfolio overlap between managers grows, they become harder to explain. This year we have seen lawsuits in the US alleging misstated NAVs, delayed loss recognition and inadequate valuation processes, and the SEC has named private credit as an examination priority.
But again this raises a question of disclosure versus operations. Even if firms wanted to increase transparency, they often find themselves limited to manual workarounds built on spreadsheets that were not designed for rapid, auditable disclosure.
With pressure mounting to provide accurate, frequent and auditable valuations, firms need to act now to get their back-office infrastructure in place, improving data management, automating processes and strengthening exception handling.
What provable looks like
Private credit is bespoke by nature, and any progress towards standardization will likely take years to implement. New file formats can appear overnight, and counterparties are unlikely to change what they send, or how they send it.
Any back office gearing up for greater disclosure requirements will need to ensure that ingesting this data is not a manual task, with automated matching at the 99th percentile so that human attention is only needed in exceptional cases.
The next critical factor is auditability. Many teams are starting to experiment with AI tooling to improve their data ingestion, and it can go a long way to solving that problem. But the auditability problem remains – and a system a firm has built itself is one more thing it will have to explain. Firms must build with the expectation that regulators and investors will ultimately ask them to account for every decision and every exception.
Balancing investment across front- and back-office
The rapid growth of the private credit sector has introduced some growing pains. Headlines have largely focused on returns, and whether those returns are sustainable in a tighter market. However, they obscure another issue. If managers are going to meet the increasing transparency requirements demanded by investors and regulators, they will need both the will and the means to do so. Balancing front- and back-office investment has never been more important.