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Before investing, identify exactly what you are buying, how its loans are valued, when you can get your money out, and what fees and leverage can do to your returns. A private credit company, a private fund, and a publicly traded business development company (BDC) can all provide exposure to privately negotiated loans, but they are not interchangeable: their liquidity, disclosures, fee structures, and risks differ.
Use the checklist below to examine the specific vehicle’s current offering documents or public filings. It is a due-diligence framework, not a recommendation or an assessment of any unnamed company.
1. Identify the investment vehicle and what it owns
Start with the legal structure and the route your money takes. You could be investing directly in a lending business, buying into a pooled private fund, purchasing shares of a public BDC, or investing indirectly through another vehicle. Those choices determine which documents govern your investment and what rights you have.
- Read the offering documents or public filings. Identify whether the portfolio focuses on direct lending, asset-based lending, or another strategy, and whether your exposure is direct or through one or more funds.
- Separate the lender from the investment vehicle. A company that originates loans and a fund or BDC that owns loans are different things to evaluate. Trace which entity holds the assets, borrows money, charges fees, and owes obligations to investors.
- Check what information is available. Public BDC filings may provide disclosures that differ from those available for a private fund. Review what the documents actually report about borrowers, portfolio composition, valuations, and risks.
2. Assess the borrowers, loans, and potential recoveries
Private credit risk varies from one borrower and loan to another. A headline yield alone cannot tell you how likely a borrower is to repay or what investors might recover after a default.
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- Borrower capacity: Examine borrower leverage, the stability and variability of cash flow, company size, and the financial and operating information available to assess performance.
- Position in the capital structure: Determine whether the loan is senior or subordinate to other debt. Seniority affects who has a claim on value if a borrower runs into trouble.
- Collateral and coverage: Review what collateral secures a loan, its quality, and how its value compares with the amount owed. Consider whether the collateral could retain value in a downturn.
- Portfolio concentration: Look for exposure concentrated in particular borrowers or sectors. A portfolio with concentrated exposures may be more sensitive to trouble in those companies or industries.
- Default scenario: Ask what claims rank ahead of the loan, what assets could support repayment, and how the stated protections would work in practice. The SEC-filed risk disclosure at this registration statement illustrates borrower and credit factors to examine; it does not establish conditions at every issuer.
3. Find out how loan values are determined
Privately negotiated loans may lack an active secondary market, making valuation less straightforward than observing a frequent market price. A reported net asset value (NAV) is an estimate of portfolio value; it is not necessarily the amount the investments could be sold for promptly.
- How often are loans valued, and what methods and inputs are used?
- Who is responsible for the valuation, and who reviews it?
- Are independent pricing or other valuation controls used?
- How are changes in borrower performance, market conditions, or credit quality reflected?
The SEC’s Investor.gov bulletin notes that a BDC’s valuation process, especially for private investments and private companies, requires judgment; assigned values may be uncertain and may fluctuate over short periods. Read the SEC’s BDC investor bulletin for an explanation of this issue.
4. Check when and how you can exit
Liquidity has two layers: the terms for your investment and the ability to sell the underlying loans. A fund may offer redemptions under specified conditions even though its loans are difficult to sell; that policy does not make the loans themselves liquid.
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- Check whether you must meet capital calls, and what the documents say if you cannot meet one.
- For a public BDC, distinguish the ability to trade shares on an exchange from the liquidity of the private loans in its portfolio. The share price may change, and exchange trading does not make those loans readily saleable.
5. Calculate fees across the whole investment
Estimate the costs that apply to your investment rather than relying on a single management-fee figure. Include advisory or management fees, incentive fees, operating expenses, and fees charged by any underlying funds. Review how incentive fees are calculated and when they apply.
For a BDC, check whether fees are based on gross assets that include borrowings. If they are, leverage can enlarge the fee base; compare the fee terms with the company’s borrowing and portfolio structure before estimating what investors bear.
6. Stress-test borrower and vehicle leverage
Examine debt at both levels: the borrowers’ own leverage and the investment vehicle’s borrowing. Borrower-level debt can make repayment more sensitive to financial pressure, while vehicle-level borrowing can magnify the effects of changes in asset values and financing costs on the investment.
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Find out whether loans or borrowings have floating rates. Rising rates can increase interest expense for a borrower with floating-rate debt; the vehicle’s own borrowing costs and the values of its assets may also respond to rate changes or a downturn. Consider how the structure would fare if borrowers weakened, asset values fell, or financing became more expensive. Leverage can amplify losses as well as gains.
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A publicly traded BDC has an exchange-traded share price as well as a reported NAV based on the value assigned to its underlying investments. The share price can be above or below that NAV. Compare both, and review the factors behind the portfolio’s reported value rather than treating NAV as a guaranteed sale price.
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When comparing BDCs, use documents with matching dates and examine the same dimensions for each: asset mix and borrower quality, leverage, loan seniority and collateral, valuation methods and frequency, concentration, fee and incentive mechanics, and disclosures. Keep exchange prices distinct from reported portfolio values.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.8. Review conflicts and governance
Read disclosures about affiliated transactions, how investment opportunities are allocated, who controls valuation decisions, and how incentive fees may affect decisions. Check whether the sponsor or lead investor has responsibilities or interests that could differ from yours, and look for a clear explanation of how conflicts are identified and managed. A high stated yield does not answer those governance questions.
SEC Commissioner Hester M. Peirce’s October 15, 2024 remarks summarized concerns about the absence of prudential regulation for private credit funds and questions about valuation reliability where secondary markets are lacking. Those are concerns she described, not a finding that every private credit vehicle has the same risks. Read her remarks on private credit in that context.
What to compare before choosing between vehicles
For a useful comparison, use current documents covering the same reporting dates wherever possible. Compare the following features without mixing reported portfolio valuations with exchange prices:
| Comparison area | What to examine |
|---|---|
| Asset mix and borrowers | Strategy, borrower quality, company and sector concentrations, and available borrower information |
| Leverage | Borrower-level and vehicle-level borrowing, including how financing costs could change |
| Loan protections | Seniority, collateral quality and coverage, and potential recovery prospects |
| Valuation | Methods, inputs, frequency, responsibility, review, and independent controls |
| Liquidity and exit | Lockups, transfer limits, redemptions or repurchases, gates, and capital-call obligations |
| Fees | Management or advisory fees, incentive fees, operating expenses, underlying-fund charges, and the fee base |
| Public BDC pricing | Exchange share price relative to NAV, with each figure tied to its date |
Use current documents for the specific issuer
General due diligence cannot establish the current terms, risk profile, or tax treatment of a particular fund or BDC. Check that vehicle’s current governing documents and filings, and consider qualified financial and tax advice for your circumstances. The SEC-filed disclosure cited above is an example of relevant risk factors, not evidence that every issuer has the same conditions.
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