Yield (i.e.“current yield”) is the annual income generated by a loan, expressed as a percentage of its purchase price or par at inception. It is normally the main driver of return in private credit. For floating-rate loans, yield comes from three components: the base rate, such as SOFR; the credit spread added above the base […]
Workout is the process managers use when a borrower shows signs of stress or enters default. The goal is simple: protect and recover as much value as possible for investors. Strong managers step in early, working with the borrower and any sponsors to renegotiate terms, adjust the structure, or secure additional support. When needed, they […]
Underwriting is the heart of private credit. It begins with screening, where managers quickly eliminate deals that do not meet their risk and return criteria. The strongest opportunities move into deeper analysis, including financial modeling, covenant design, stress testing, and a review of operational and legal details. Throughout the process, deal teams and investment committees […]
Transparency is about clarity and trust. In private credit, it means giving investors a clear view into how decisions are made, how risks are managed, and how the portfolio is performing. Strong managers communicate to investors openly about deal terms, governance processes, and any changes in borrower health. This level of visibility helps investors evaluate […]
The way a private credit fund is structured—and the terms set at inception—can shape both risk and return. Beyond fees and expenses, fund terms influence alignment of interests, asset allocation guidelines, and governance standards. Thoughtful structuring can also improve tax efficiency, enhancing after-tax returns for investors.
Scale matters in private credit. Larger managers often benefit from deeper resources, broader sourcing networks, and stronger negotiating power – advantages that can translate into better deal flow and more selective underwriting. Scale also supports operational efficiency and portfolio diversification, helping reduce risk while maintaining consistent returns. For example, a manager with the resources and […]
Sourcing is the engine of private credit. Strong sourcing gives managers access to a wider set of opportunities, which improves selectivity and helps avoid weaker deals. Established relationships with private equity sponsors and borrowers often generate repeat business, creating a steady pipeline of high-quality transactions. Incumbent lenders also benefit from deeper knowledge of existing borrowers, […]
Leverage amplifies both risk and return in private credit. It’s typically measured using ratios like Total Debt / EBITDA, First Lien Debt / EBITDA, and Debt-to-Equity. Higher leverage generally means greater risk, but it can also enable borrowers to pursue growth or acquisitions. Another key metric is Loan-to-Value (LTV) – the loan amount as a […]
Active oversight is essential in private credit. Managers continuously track borrower performance, covenant compliance, and emerging risks – stepping in early when adjustments are needed. This can include renegotiating terms to support growth or mitigate stress, ensuring the portfolio remains resilient. Effective portfolio monitoring also means adhering to exposure limits and diversification guidelines, protecting investors […]
Private credit portfolios are primarily composed of privately negotiated loans, which offer higher yields and typically stronger lender protections, but with the tradeoff of less liquidity. To account for this, some funds may allocate a portion to broadly syndicated loans (BSLs) or other liquid assets to meet investor liquidity needs. While this flexibility can reduce […]
Efficient operations translate directly into investor value. In private credit, streamlined processes and disciplined cost management reduce fund expenses, which can improve net returns. Operational efficiency also supports scalability – allowing managers to handle more complex portfolios without increasing overhead. For example, a manager leveraging advanced portfolio monitoring systems can minimize manual work, lower error […]
Origination fees are a key source of value in private credit. These fees are typically 100 basis points or more of the loan amount and compensate lenders for structuring and managing transactions. For example, a $50 million loan might generate $500k or more in upfront fees alone. These economics can sometimes flow through to investors […]
Net asset value, or NAV, reflects the value of a fund’s assets minus its liabilities. NAV can move up or down based on unrealized gains and losses, which track changes in loan valuations. Over time, the most meaningful driver of NAV growth is realized performance: the income earned, the gains captured, and the impact of […]
Management and incentive fees directly affect investor returns, so understanding how they work is important. Management fees are usually charged as a percentage of committed or invested capital and cover the cost of running the fund. Incentive fees, often called carried interest, reward managers for strong performance and are typically a share of income or […]
Alignment is about shared outcomes. In private credit, it means ensuring that a manager’s incentives are closely tied to those of investors. The clearest signs include meaningful co-investment by the manager and performance-based compensation models that reward long-term outcomes rather than short-term gains. When a manager prioritizes alignment, their priorities match investors.
Loan terms, including covenants, are a cornerstone of credit risk management. They set expectations for borrower behavior and give lenders early warning when performance begins to slip. A covenant might require the borrower to maintain a certain level of EBITDA or keep leverage below a defined threshold, tested each quarter. When a covenant is breached, […]
Liquidity in private credit and perpetual BDCs refers to how easily investors can access their capital. While these strategies are typically long-term and less liquid than public markets, managers may offer periodic redemption windows or structure funds to provide some liquidity. For example, a BDC might allow quarterly share repurchases, giving investors an exit option. […]
Managing private credit well requires minimizing net losses. Portfolios experience two types of gains and losses – realized and unrealized. Unrealized gains and losses reflect shifts in a loan’s value based on market conditions or borrower performance. These movements can be a significant source of NAV volatility but are non-cash in nature and either reverse […]
Governance and compliance form the backbone of private credit fund management. Strong governance ensures that decisions are made responsibly, risks are identified early, and potential conflicts are managed appropriately. Effective compliance frameworks help managers meet regulatory requirements, maintain accurate reporting, and uphold the standards investors expect from an institutional platform. Robust oversight also supports transparency, […]
Fund leverage refers to the borrowing a private credit fund uses to enhance returns. It can amplify gains, but it also increases risk, which is why the structure and cost of that financing matter. Some funds use moderate, low-cost leverage to boost returns, while others rely on more complex or higher-cost facilities. It is also […]
Leading lenders are capable of offering best execution to sponsors across deal sizes and markets, be it sole lender execution, a direct club execution or a syndication. Strong execution capability allows a manager to move quickly from sourcing to closing, which can be an advantage in competitive markets. It also increases the likelihood of securing […]
Experience plays a major role in private credit. It reflects a manager’s ability to navigate credit cycles, structure deals well, and respond quickly when conditions change. Managers with long track records have seen a wider range of scenarios, from stable markets to severe stress, and that history usually shapes better judgment. They also tend to […]
Distributions, or dividends, are one of the most important sources of return in private credit. They are derived from the income generated by the underlying loans after fees and expenses and are paid out to investors over the life of the fund or a Business Development Company (“BDC”). Distribution policies vary, but most are designed […]
Diversification is a cornerstone of risk management in private credit. By spreading exposure across industries and issuers, managers reduce the impact of any single borrower or sector underperforming. For example, a portfolio balanced between healthcare, technology, and manufacturing can help smooth returns – even if one sector faces headwinds. Most managers set strict limits on […]