A Market in transition: Optimizing CLO and credit fund operations

The merging of public and private markets is well-documented, with the private credit market experiencing extraordinary growth in recent years. According to a recent report by Percent, the private credit market is now worth about $2 trillion,¹ nearly equaling the size of the broadly syndicated loan market. This evolution brings new opportunities for borrowers and investors alike.

Barring any impact by market volatility, growth of the private credit market is projected to hit $3.5 trillion globally by 2028,² driving more managers to enter the private credit market to meet investor demand and capitalize on the opportunity.  In doing so, they are offering loans in different fund wrappers, with the market now expanding beyond the traditional closed end draw down funds to include products such as exchanged traded funds (ETFs) and interval funds. Managers are also having to adapt to unfamiliar processes and integrate new order management capabilities into their systems as they seek to support shifting demands. For instance, private market managers are increasingly venturing into the broadly syndicated loans space, while many public managers traditionally focused on the syndicated space are developing private market capabilities. This involves building and maintaining lending networks to enable loan origination — a significant change from public managers' usual practices.

With private credit on the rise in the CLO and credit fund space — and with new CLO issuance reaching an all-time high of $191 billion as of November 2024³ — to effectively compete, managers but equip themselves with tools to help clients capitalize on the transforming landscape, while also driving operational efficiency and remaining profitable. 

The Challenges: unstructured data, operational inefficiencies
 

Unstructured data and how loan data is communicated are among the most pressing issues for the industry. Data ingestion — the intake, processing and normalization of the data for use — is critical to operational excellence in credit and loan administration. The bespoke nature of the traditional syndicated loans market, where credit agreement terms and conditions can be tailored to borrower and lender needs, offers flexibility but also presents challenges to standardizing how the data is ingested and ultimately consumed. While efforts are underway to achieve standardization of data for greater efficiency, the growing presence of private credit to the market, however, with its smaller lending groups and bespoke processes and communication methods, has added complexity. EY’s Global Alternatives Fund Survey indicates that data management and integration are significant concerns for alternative fund managers, with more than half of the those surveyed facing issues with real-time data or integration across functions^4.

The lack of standardization in data messaging formats and fields across industry tools and platforms leads to inconsistent data being communicated between transactions, making it difficult for managers to make well-informed decisions about asset performance. 

The way data is communicated is also not standard across the industry, with various channels and interaction models between borrowers and their treasury desks. This can result in a substantial amount of daily work for multiple parties to check each other's numbers, come to an agreement and produce reports upon which investment decisions can be made.

Another obstacle for managers is the heavy reliance on manual processes for reconciliation and settlement that are inherent in the over-the-counter loan market. Unlike other investment instruments, where settlement occurs electronically via exchanges, the loan market involves trading over-the-counter. End-to-end operations and reconciliation still rely heavily on manual, legacy processes, which can lead to operational inefficiencies, risks, input errors, data breaks and added costs. Loan settlement typically takes ten to 25 days, and manual processing can be particularly challenging during high-volume reporting periods. Coupled with the challenge of non-standardized data ingestion, the demand for private credit has increased the manual effort required by all parties.

Emerging trends for more effective data management
  

Given the importance of effective data ingestion as the foundation of any successful CLO or credit fund operational model, industry players are actively working to create more structured data and messaging. Automation, supported by advanced technology is already making a significant impact on performing more frequent data reconciliation, but more development is needed, in addition to standardization of data, for mainstream adoption.

Absent material standardization in the loan market to date, managers’ frequent and thorough reconciliation with loan and fund administration partners is crucial for operational efficiency. Regular reconciliation helps address issues and exceptions by maintaining consistent alignment and enabling discrepancies to be corrected immediately, rather than waiting until critical reporting dates. Early and frequent reconciliation can also lead to a smoother reporting process and potentially reduce pressure on managers and loan administration providers during report cycles.

Many firms are also looking to service providers for access to advanced technologies that can help streamline workflows, standardize operations and help enable managers to scale. In fact, 69% of respondents to the EY Alternative Fund Survey stated operational efficiency as the top driver of their technology investment.⁵

The industry is also adopting more structured consumption mechanisms within their facility set-up processes. Optical Character Recognition (OCR) is being utilized to electronically “read” PDF documents — capturing, interpreting and processing relevant asset characteristics automatically. In addition, there is a growing movement around the use of artificial intelligence (AI) and large language models to enhance the flexibility of document consumption tools, enabling them to extract more critical information with less training over time.

AI and machine learning can also add considerable value by performing ongoing data quality checks, identifying and addressing common errors and enhancing straight-through processing. These technologies can help managers overcome challenges posed by the loan market's unstructured, memo-based nature and the use of legacy platforms.

Alongside AI, there is an opportunity for the industry to better leverage existing technologies, guided by human intelligence, to establish frameworks for exception-based tasks. This approach helps identify what can be consumed automatically and what requires manual processing. By focusing on these guardrails, attention can be directed specifically to where human intervention is needed, rather than on each transaction.

Transparency and confidence
 

To enhance transparency for clients across many aspects of the CLO lifecycle, leading service providers are investing in tools to increase managers’ visibility into the administration cycle and help ensure correct information is accessible on-demand as well as disseminated at scheduled reporting periods. This alone can be a game changer as managers deal with multiple structures and communicate with various third parties — ranging from clients to regulators and other industry participants.

To ensure smooth and efficient functioning, integration and interoperability of different data layers are essential. Technology solutions that can consume disparate data sources, standardize them and present them for consumption in a fit-for-purpose way across personas and use cases are vital for managers to navigate the evolving market. For instance, some data management platforms can ingest data from multiple
third parties — such as market data providers and servicing vendors — to offer complete oversight of transactional data, reference data and other types of data through a centralized repository. Acting as an outsourced data engine across a client’s entire book of business, reports can be built and ingested into the client’s own systems, ensuring seamless integration.

Managers need complete transparency into holdings, data breaks and documents to make informed investment decisions and meet regulatory requirements. But improved transparency goes beyond regulatory compliance; it can also enhance the reliability of data as a valuable asset for managers. With more trust in data quality, managers can make assessments with greater confidence, reducing the need for frequent double-checking and reevaluation. This improved data confidence is particularly important as the market appears poised for further growth.

Service providers can deliver significant value by supplying accurate, timley and integrated data, empowering managers to better meet their reporting obligations, reduce risks, improve overall perfomance and capitalize on growing market opportunities. 

Beyond the back office: optimizing across the credit lifecycle
 

Moving beyond back-office operations, there are several other areas that present opportunities for managers to strengthen operating models, gain efficiencies and differentiate themselves in the market. Liquidity management and financing are two areas in which this can be applied. To effectively manage liquidity, managers should have access to a timely and comprehensive view of all investment operations data.  The market demand for centralizing liquidity and financing activities within a single ecosystem creates efficiencies and scalability, allowing more flexibility to consider a broader pool of asset types to use as collateral. Integration with custody and payments offers a stable balance sheet for deposits and immediate proceeds upon redemption, while real-time trade confirmations and reports allow for instantaneous updates and views into position changes. In turn, this helps to maximize liquidity, manage risks and improve performance.

Additionally, middle office solutions such as performance, attribution, and risk services — especially when integrated with fund and loan administration offerings — can enable better decision-making and risk mitigation, along with fulfillment of investor and regulatory reporting requirements. Benefitting from a unified view of investment data, managers can more easily monitor fund activity, understand the impact of investment decisions and identify and execute on growth opportunities. 

With the growing demand for credit products and fierce manager competition, distribution is a crucial area to focus on. By connecting with wealth advisors who are seeking credit products, managers can strengthen their distribution efforts and reach a broader audience of investors looking for new ways to diversify their portfolios and generate alpha. Service providers who offer comprehensive solutions can be valuable allies in this area, offering connections and introductions that can help drive distribution and growth.

Identifying the right service provider 
 

The right service provider can be transformational for credit managers looking to achieve operational excellence and competitive differentiation. Domain expertise, scale, resiliency and flexible technology are all critical factors to consider when evaluating potential partners.

Specialized expertise in the credit space is an important factor for credit managers. A provider that genuinely grasps the nuances of the credit asset class can deliver valuable insights and consultation to help managers navigate the rapidly evolving market and evaluate opportunities to optimize operations through specialized services and technology.  Providers should be set up to adapt to rapidly changing consumption models and be flexible enough to fit managers' evolving needs.

Achieving operating model scalability is identified as one of the industry’s top strategic priorities⁶. As the market grows, so will the volume and complexity of data that managers need to handle. This underscores the importance of choosing a provider that offers scalable, resilient technology, ensuring managers can effectively consume data and use it to seize opportunities as they emerge.  

While leading-edge technology is important, it is essential to look for providers that have clearly articulated roadmaps for advancing their products — simplifying work and driving client success. A service provider that invests in the latest technology, coupled with a strong and agile product management discipline, can provide managers with fit-for-purpose tools to support their current and future needs. This includes tools for data ingestion, processing efficiency, accurate and timely data reporting and regulatory compliance.  Some providers are already delivering increased automation, straight-through-processing, exception-based task and escalation workflows, systematic integration via APIs and cloud data-sharing, greater transparency via online dashboards and overall improved client experiences.  

Ideally, the right service provider should act as an extension of their client's shop, providing seamless technology integration and well-honed operational workflows.  This collaboration can lead to increased efficiency, cost savings and better decision-making across various stages of the credit lifecycle.

When evaluating a service provider, credit managers would be well served to ask the following essential questions:

1. How do you support the entire operational workflow, from data ingestion to processing and reporting?

2. What measures do you take to ensure data quality, accuracy and standardization to support decision-making and regulatory compliance?

3. How do you facilitate technology integration, streamline workflows and communications, and automate manual processes to enhance processing efficiency?

4. What are you doing to ensure transparency in reporting, including timely and accurate data  reporting and complete transparency into holdings, breaks and documents?

5. Beyond operational support, what other products or services do you offer that could help enhance the management of our credit book?

By collaborating with a tenured service provider that offers specialized expertise, investments in technology and streamlined processes, credit managers can achieve operational excellence in credit management and enter a phase of growth where resources can be reallocated to focus on decision-making to stay ahead in an ever-evolving market. The right service provider can help managers turn data into an asset, increase efficiency, and improve the overall client experience.

¹“2025 Private Credit Outlook,” Percent, January 2025, https://percent.com/resources/2025-private-credit-outlook/ 

²Peter Madigan, “The Inexorable Rise of Private Credit,” BNY, June 26, 2024, https://www.bny.com/corporate/global/en/insights/rise-of-private-credit.html 

³“CLO Issuance Sets Annual Record, Poised for Busy 2025,” LSTA, December 3, 2024, https://www.lsta.org/news-resources/clo-issuance-sets-annual-record-poised-for-busy-2025/ 

⁴Jessica Bloom, Jun Li, Ryan Munson, Meghna Mukerjee, “How Can Alternative Fund Managers Shape New Horizons of Opportunity?” EY, December 11, 2024 https://www.ey.com/en_us/insights/wealth-asset-management/how-can-alternative-fund-managers-shape-new-horizons-of-opportunity 

⁵Jessica Bloom, Jun Li, Ryan Munson, Meghna Mukerjee, “How Can Alternative Fund Managers Shape New Horizons of Opportunity?” EY, December 11, 2024 https://www.ey.com/en_us/insights/wealth-asset-management/how-can-alternative-fund-managers-shape-new-horizons-of-opportunity

⁶Jessica Bloom, Jun Li, Ryan Munson, Meghna Mukerjee, “How Can Alternative Fund Managers Shape New Horizons of Opportunity?” EY, December 11, 2024 https://www.ey.com/en_us/insights/wealth-asset-management/how-can-alternative-fund-managers-shape-new-horizons-of-opportunity

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