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What to Check Before Investing in Private Credit Companies

A practical diligence checklist for private credit funds and BDCs: understand the loans, valuation, exit terms, fees, leverage and governance before investing.
From TheFinanceBase Team5 min to read
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Before investing in private credit, first identify what you are buying: a private fund, a publicly traded business development company (BDC), or another vehicle that lends to or holds privately negotiated loans. Then assess the loans, valuation, liquidity, fees, leverage and conflicts using the vehicle’s current offering documents or public filings. These structures can have very different exit rights and disclosures, so a headline yield alone is not enough to judge the investment.

What should I look for before investing in private credit?

Use the checklist below to evaluate both the investment vehicle and the loans behind it. A private credit company may be the lender itself, while an investor may actually be buying a fund or publicly traded security that owns loans. Read the documents for the specific vehicle, and compare multiple investments using information from matching dates.

1. Identify the vehicle and what it owns

Read the offering documents, prospectus or public filings to determine whether the exposure is direct lending, asset-based lending, a pooled fund, a BDC or an indirect investment through another fund. Establish whether you are assessing the lender or buying a vehicle that holds loans. This distinction affects fees, disclosure, leverage, valuation and how you may exit.

2. Assess borrowers and loan protections

Look beyond the number of loans. Review borrower leverage, cash-flow variability, company size, debt seniority, collateral quality and collateral coverage. Check how concentrated the portfolio is by borrower and sector, and what financial and operating information is available to investors.

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Consider the consequences of default: which creditors have claims ahead of the loan, what collateral supports repayment, and how much protection does that collateral appear to provide? A loan’s label or stated yield does not answer these questions. An SEC-filed risk disclosure offers examples of borrower credit factors to examine, but it is not evidence that those conditions apply to every issuer: SEC registration statement describing private credit risks and borrower credit factors.

3. Examine how loans are valued

Ask how often the vehicle values its loans, what methods and inputs it uses, who reviews the valuations, and whether independent pricing or valuation controls are involved. Private loans may not have an active secondary market, making a reported net asset value (NAV) different from the price the investments could fetch in a prompt sale.

The SEC’s Investor.gov bulletin cautions that a BDC’s valuation of private investments requires judgment and assigned values may be uncertain and fluctuate over short periods. Treat reported NAV as a valuation, not as a guaranteed sale price: SEC Investor.gov bulletin on publicly traded BDCs.

4. Read the exit terms—and distinguish them from loan liquidity

For a fund, check lockups, transfer limits, redemption or repurchase terms, gates and any capital-call obligations. A stated redemption policy governs the vehicle; it does not make its underlying loans liquid or guarantee that redemption requests can be met on the schedule an investor might prefer.

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Public BDC shares may be bought and sold on an exchange, but that offers a market for the shares—not necessarily for the private loans in the portfolio. Share-market liquidity and the price available for shares are separate from how readily the BDC could sell its underlying loans.

5. Calculate all-in fees

Add management or advisory fees, incentive fees, operating expenses and any charges from underlying funds. Understand when incentive fees apply and how they are calculated. For a BDC, check whether fees are based on gross assets that include borrowings: if so, leverage can increase the fee base as well as investment exposure.

6. Stress leverage and interest-rate exposure

Assess borrowing at two levels: the borrowers’ own debt and the investment vehicle’s borrowing. Consider how floating-rate loans could change a borrower’s interest expense and ability to pay, and how changes in rates or a downturn could affect the vehicle’s borrowing costs and asset values. Leverage can magnify gains and losses; it is not a risk confined to the borrowers.

7. Review conflicts and governance

Read disclosures on affiliated transactions, allocation of investment opportunities, incentive fees, valuation responsibilities and reliance on a lead investor or sponsor. Look for a clear account of who makes decisions and how conflicts are managed. A headline yield does not resolve governance questions.

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How risky is private credit?

Risk depends on the specific borrowers, loan terms and investment structure. Borrower leverage, cash-flow variability, senior claims, collateral quality and coverage affect the prospect of repayment and recovery. At the vehicle level, valuation uncertainty, limited liquidity, fees, leverage and conflicts can add separate risks.

In October 2024, SEC Commissioner Hester M. Peirce described concerns about the absence of prudential regulation for private credit funds and the reliability of valuations where secondary markets are lacking. Those were concerns she summarized, not a finding that every private credit vehicle has the same risks: Peirce’s October 15, 2024 remarks on private credit.

Can I get my money out of a private credit fund?

That depends on the fund’s governing documents. Check its lockup, redemption or repurchase schedule, transfer restrictions, gates and capital-call provisions. Even if a fund permits redemptions, its underlying private loans may be hard to sell quickly; the fund’s exit terms and the liquidity of its assets are distinct questions.

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How do I compare BDCs?

For a publicly traded BDC, compare its exchange share price with reported NAV per share, alongside the portfolio and terms that help explain both. Shares can trade above or below the value assigned to underlying investments, and that assigned value involves judgment.

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Comparison area What to examine
Portfolio Asset mix, borrower quality, portfolio and sector concentration, and dates of the reported figures.
Loan protections Debt seniority, collateral quality and coverage, and potential recovery protections.
Leverage Borrower-level and BDC-level borrowing, including how rates and a downturn could affect each.
Valuation Valuation method and frequency, review responsibilities, controls, and reported NAV compared with the current share price.
Fees All-in costs, incentive-fee mechanics, and whether fees use gross assets including borrowings.
Liquidity and disclosure Share-market trading, portfolio liquidity, available disclosures, and the relevant dates for each figure.

Use current filings and compare figures from the same reporting dates where possible. A share price is a market price for the BDC’s stock; NAV is the reported value assigned to its assets after liabilities. Neither should be substituted for the other.

What the checklist can—and cannot—tell you

These checks help identify the questions a particular vehicle’s documents should answer; they do not rank private credit companies or establish that a specific investment is suitable. The SEC-filed disclosure cited above illustrates relevant factors, not conditions at every issuer. Obtain current governing documents and filings for the vehicle you are considering. This is general information, not individualized investment or tax advice.

Product prices and availability are accurate as of the date/time indicated and are subject to change. Any price and availability information displayed on Amazon at the time of purchase will apply.

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