The Case for Smarter Loan Operations in a Stressed Market

Over the past decade, the direct lending industry has experienced sustained and impressive growth. Despite headwinds like rising interest rates, inflation, and ongoing geopolitical uncertainty, private credit has continued to draw significant investor capital. This momentum has been fueled by strong portfolio valuations and reliable income generation, which have helped expand assets under management across the sector.

But beneath these headline figures lies a growing vulnerability: loan operations. While investors and managers often focus on underwriting and portfolio strategy, the systems and workflows supporting loan administration are increasingly under strain — and in many cases, becoming a bottleneck to growth just as market volatility surges once again.

A Complex Landscape Meets Aging Infrastructure

The macroeconomic backdrop for private credit has become significantly more challenging in 2025. After a period of relative calm, the escalation of U.S. trade tariffs, persistent inflation and high interest rates has reignited volatility across credit markets. Borrowers exposed to global supply chains and trade-sensitive industries, such as manufacturing, retail, and technology infrastructure, have seen margins squeezed by rising input costs and supply disruptions.

Lenders and borrowers alike are grappling with shifting cost structures and tighter capital markets. The leveraged loan market recently experienced one of its most volatile periods since the pandemic, with secondary market prices sliding and institutional loan issuance stalling. Banks are increasingly relying on private lenders to fill financing gaps as public credit investors balk at new risk.

Amid these pressures, borrowers are struggling to maintain stable cash flows. Last month, the International Monetary Fund warned that almost 50% of private credit borrowers were cash flow negative, up sharply from just 25% three years earlier. Amendments, restructurings, and payment-in-kind (PIK) elections, once used sparingly, are now commonplace.

While these flexible deal terms have mitigated defaults and allowed lenders to support borrowers through temporary stress, they have dramatically increased the complexity of loan administration. Each amendment can alter payment schedules, interest rates, waterfall structures, and covenant terms. PIK interest, while easing short-term cash burdens for borrowers, adds layers of accounting and reporting complexity.

Recent data highlights the fragility beneath the surface. Covenant default rates increased to 2.4% overall by the end of 2024, with smaller borrowers (less than $30 million in EBITDA) showing a default rate of 13.8%. The share of borrowers flagged for covenant or payment stress has also risen, particularly in consumer-facing sectors most exposed to tariff-related cost increases and weaker demand.

Operational Inefficiency Becomes Portfolio Risk

Most operational teams are still relying on manual workflows built around Excel or legacy software that was never designed for today's dynamic deal structures. Even large funds report tracking amendments and PIK elections in spreadsheets, increasing the risk of errors and slowing down critical decision-making.

These operational weaknesses are becoming more than just administrative headaches. Indeed, managers are postponing defaults and markdowns not just out of optimism, but because their infrastructure cannot keep up with deal complexity and change velocity. This has led to overstated valuations and misreported returns in some portfolios.

Market volatility has increased the risk of pricing and payment mismatches, particularly in portfolios where loan operations cannot accurately and efficiently process amendments and updates.

When operational teams lack the tools to track amendments, calculate effective rates, and manage payment schedules in real time, the consequences extend beyond inefficiency. Errors in NAV calculations, payment distributions, or covenant compliance reporting can result in financial losses, regulatory breaches, and damaged investor trust.

A recent study of loan operations professionals found that manual workarounds and lack of standardization significantly lowered perceptions of data quality and system usability, leading to increased frustration and avoidance. This was particularly noteworthy given that over 70% of respondents had more than three years of experience, indicating that even seasoned professionals struggle with inefficient or unintuitive systems.

Technology Lagging Behind Market Evolution

While private credit investment teams have embraced data-driven decision-making, the technology supporting loan operations has not kept pace. Most loan management systems were built for syndicated loans or fund accounting, not for direct lending structures that often include unitranche deals, leverage-based pricing grids, participations, and dynamic amendments.

As deals evolve — whether through amendments, restructurings, or pricing changes — updates must often be entered manually across multiple disconnected systems. Reporting typically requires consolidating data from disparate sources, which increases both the workload and the potential for human error.

This fragmented, manual approach is incompatible with today's fast-moving market environment, where lenders must rapidly assess borrower amendments, adjust payment schedules, and respond to investor queries — all while maintaining accuracy and auditability.

An Inflection Point for Private Credit Operations

The private credit industry stands at a critical juncture. Operational workflows that were sufficient even five years ago now represent a source of risk. Market volatility, economic uncertainty, and borrower complexity are changing the internal dynamics across direct lenders.

As investor expectations rise and regulators increase their scrutiny of private credit, the cost of operational shortcomings will only grow. Forward-thinking firms are investing in integrated loan operations technology that automates administrative tasks and can manage complex deal structures.

This is not just a search for greater efficiency. It is about enabling scalability, improving accuracy, reducing risk, and ultimately safeguarding both fund performance and investor confidence in a more volatile and demanding market.

Conclusion

Long viewed as a back-office function, loan operations are now emerging as a strategic priority for direct lenders. As rising borrower stress increasingly translates into amended deal terms, restructurings, and evolving payment structures, loan ops teams must be equipped to adapt quickly. The ability of GPs to manage these inevitable changes will depend heavily on whether their operational infrastructure can scale to meet the moment.