The unprecedented growth in private credit continues to drive a record influx of new lenders as industry assets and commitments reach historic levels — now in excess of $2 trillion. Firms continue to launch private lending services at an accelerating pace, capitalizing on the sector’s unprecedented expansion.
Private lenders are grappling with an increasingly complex business and risk environment — and intense competition. Firms must innovate in deal sourcing, due diligence, and monitoring in order to maintain optimal deal volume, get into good deals before competing firms, conduct exhaustive due diligence and close fast, and identify risks early — before damage occurs.
The ability of firms to effectively navigate this new environment and exploit opportunities faster than peers will be the primary determining factor for success in the coming decade.
Private Companies Are More Complex Than Ever
Driven by globalization trade policies and technology, it’s easier for companies to enter new markets and source raw materials/components from around the world to maximize profits. Harvard Business Review calls this the rise of “global native” companies, and Andreessen Horowitz defines the company of the future as “default global.” Global thinking is no longer a business pivot but a fundamental operating principle.
Today’s businesses operate within complex global networks of locations, subsidiaries, and value chain participants in a dance of highly coordinated logistics. As more substantial firms opt to remain private, eschewing IPOs, a seismic shift is underway in how private companies structure their operations, mirroring the international reach once exclusive to their public counterparts.
While this global thinking offers private companies and markets unprecedented opportunities for value creation and scalability, it also presents a double-edged sword for private lenders. The task of gathering corporate intelligence — crucial for maintaining robust deal flow, thorough due diligence, and effective oversight — has become increasingly complex.
This new reality favors well-resourced firms with deep expertise that have the ability to efficiently collect and analyze information from sources globally faster than other firms — giving them a leg up in the race for private market dominance.
Global Business Risks Are Growing in Complexity and Consequence
Global private companies are operating in an increasingly complex risk landscape. While highly synchronized supply chains drive competitiveness and profitability, just-in-time (JIT) efficiency comes at a cost: fragility. A global pandemic, major conflicts, and climate-driven natural disasters have exposed the brittleness of our interconnected systems. For instance, a single ship’s mishap in the Suez Canal instantly brought 12% of global trade to a halt.
In addition, a new category of risks has emerged over the past decade, demanding attention from businesses, investors and lenders worldwide. Categorized as “non-financial” risks and labeled as reputational, ESG or sustainability concerns, they carry significant material consequences. As private companies expand globally, adept awareness and management of these issues is essential, reshaping the way businesses approach their overall risk strategy and corporate governance.
The impact blast radius of corporate misconduct and controversy has expanded dramatically. Companies now face scrutiny not only for their own actions but also for those of their entire operating ecosystem. Investors, customers, regulators and the public increasingly demand accountability for environmental, labor and financial transgressions across the board — from subsidiaries and suppliers to value chain partners, owners, board members, and key executives.
Private lenders must put more focus on ensuring they — and the companies they lend to — are in compliance with a growing range of regulations, sanctions and activities in line with other market expectations — and stay that way. An overwhelming majority of nations have enacted legislation addressing forced labor, the environment, and consumer protection. The damage from these non-financial risks can include double-digit loss of shareholder value, regulatory fines set at a percentage of revenue, and reputational brand damage that can be difficult or impossible to mend.
Answering the Private Credit Information Paradox
Good private lending decisions hinge on accurate, timely information. While private companies traditionally operate with limited transparency, the digital age and evolving regulations mean more relevant data is available, albeit noisy. Firms paradoxically have too much noisy information and not enough of the right information.
Evaluating a private company’s creditworthiness now requires extracting meaningful, up-to-date insights from a complex web of data feed subscriptions, company reports, regulatory actions, cybersecurity incidents, lawsuits, shipping data, consultant reports, and local news coverage in order to turn it all into timely, actionable investment intelligence.
Private credit teams that excel in efficient and effective data processing gain a significant competitive advantage. They’re able to identify prospective borrowers early and engage before competing firms — or promptly pass on poor-fit companies and move on. Their ability to uncover hidden and emerging risks allows for proactive collaboration with executive leadership, mitigating potential crises before they escalate. This information superiority positions teams to exploit idiosyncratic risks and opportunities more consistently, ultimately delivering superior returns to investors.
AI Is Flattening the Private Credit Information Curve
The ability to transform raw data into actionable insights has become the key differentiator for success in private credit. Traditionally, this meant deploying armies of analysts to cover a vast spectrum — from supply chain mapping to controversy tracking, regulatory monitoring to labor law evaluation, and from gauging unrest to assessing the impact of events on revenue, profits and goodwill. However, artificial intelligence is changing this, and fast.
AI has already demonstrated immense potential in answering the information paradox by swiftly generating valuable private market insights for firms, without requiring the time or manual effort. This AI-driven shift is beginning to level the playing field, enabling firms of all sizes to compete more effectively in the complex, knowledge-intensive world of private credit.
While trust in traditional generative AI models remains low due to hallucination issues and data privacy concerns, a new frontier is emerging. Retrieval augmented generation (RAG) represents a significant breakthrough by accessing real-time information and industry-specific datasets to produce accurate, trustworthy outputs free from hallucinations. RAG’s ability to generate responses based solely on verified data marks a turning point in AI’s application for private credit as firms change the way they process and leverage data — and retool their knowledge-intensive decision-making workflows.
We’re just now starting to see more private markets teams offload time-consuming and tedious manual tasks to “AI agents” so they can move up the value-added curve and do what they do best: building relationships, focusing on strategic decisions, and outperforming.
AI innovation is happening faster than any previous disruptive technology, and private credit teams need to apply its power to the complexity that comes with going global — or get lost in a sea of noise.
