The private credit market has undergone unprecedented growth over the past 15 years, scaling from $200 billion to $3 trillion globally. Driven by increased market volatility and tightened bank capital requirements following the 2008 global financial crisis, borrowers have increasingly turned to private credit for its flexibility and speed. Unlike traditional bank loans, private credit solutions can be tailored to meet borrowers’ needs in terms of size, type, and timing of transactions.
But while the sector scales, many firms are still reconciling transactions using spreadsheets and manual processes. Regulators and investors are now questioning whether firms can manage portfolios at this scale with quarterly reporting cycles and outdated workflows.
The gap between market growth and operational infrastructure is widening. As institutional investors demand greater transparency and regulators increase scrutiny, firms face a choice: invest in infrastructure that scales or accept mounting operational risk.
The operational challenge
Private credit operates differently from public markets. Each deal comes with unique covenants, payment schedules, and waterfall structures.
Firms must reconcile loan payments against ledger entries while tracking collateral and covenant compliance across custodians, trustees, and agents. Payment data arrives as PDFs, bank statements, and emails. Normalising this unstructured information – credit agreements, agent bank notices, portfolio company financials – remains the sector’s biggest operational challenge.
The consequences are too big to ignore. Covenant defaults (technical breaches of loan terms like debt-to-earnings ratios) have risen from 2.2% in 2024 to 3.5% currently. These breaches function as early warning signals of borrower stress, allowing lenders to intervene before payment failures occur.
However, catching these warnings requires reconciling borrower financial data against covenant thresholds continuously. When firms rely on manual reviews of quarterly financials weeks after submission, they miss deterioration signals until breaches have already happened. Early warning signals become crisis management.
The rise in payment-in-kind (PIK) arrangements – which allow borrowers to defer cash interest payments – suggests many firms aren’t catching these signals early enough. PIK usage has climbed from 6.5% of deals in Q4 2021 to 11% in Q4 2024.
Why automation is essential
Manual reconciliation breaks down when covenant monitoring needs to happen across hundreds of borrowers simultaneously. An operations team can’t manually check debt-to-earnings ratios against quarterly financials for 200 companies and catch problems before they escalate.
The pressure is intensifying. Expansion into retail channels through private credit ETFs means firms must deliver public-market transparency with private-market complexity.
Automation enables daily reconciliation at scale, reduces manual errors, and frees operations teams to focus on material exceptions rather than routine matching. The result is real-time visibility that investors and regulators now demand.
Firms that can’t demonstrate real-time covenant monitoring and daily reconciliation capabilities risk losing allocations to competitors who can.
What firms need to do
The biggest operational challenge is data fragmentation. Firms need systems that ingest data in any format and reconcile it automatically. Bolting compliance solutions onto existing infrastructure will only create operational hurdles down the line.
Firms should consolidate data sources into unified systems that eliminate reconciliation breaks before they occur and implement validation rules that flag exceptions immediately – not days later during batch processing. Audit trails must capture every transaction decision without manual intervention.
The choice ahead
With the private credit market projected to reach $5 trillion by 2029, investment in automation isn’t optional.
The firms investing in reconciliation infrastructure now aren’t just preparing for regulation or more demanding investors. They’re building the operational capacity needed to compete in a market that’s become too large to run on manual spreadsheets. The question isn’t whether to automate, but whether to do it now – or scramble later when the market has already moved on.