Credit where its due: The Rise of the Private Credit Market

Kelly Park Capital
#alternativeinvestments, #realestate, 2024, #investing, privatemarkets

According to recent article in Bloomberg, “Investors in private credit are currently getting better returns than they would from private equity, new data shows…” The private credit market, currently valued at $1.5 trillion, is anticipated to expand by nearly a trillion dollars in the next five years, making it a top consideration for investors.


  • Private credit can be a powerful complement to traditional fixed income strategies, offering incremental income generation, potential resilience, return enhancement, and diversification.
  • The fund's structure should align with the investor's goals, considering factors like liquidity, risk, and the desired yield.
  • Examining fee structures ensures alignment with investor interests, preventing excessive fees on assets and addressing potential risks associated with charging performance fees on unrealized returns.

Assessing Private Credit Funds

As private credit becomes a more significant component of well-managed portfolios, investors need to comprehend the diverse strategies encompassed within private credit, such as direct lending, senior secured, mezzanine, and other lending forms. It is crucial to navigate the nuances and customary loan terms associated with these strategies.

Evaluation and structuring of loans serve as substantial defense mechanisms against potential losses, and it is the primary responsibility of a professional credit manager. Here are several specific points to address with managers before committing to a private credit fund investment.

Fund Leverage

What extent of fund leverage does the fund employ?

- Many funds leverage to augment returns, utilizing loans as collateral to establish a net interest margin. Understanding the risk associated with fund leverage is essential, as excessive leverage amplifies strategy risk, relying heavily on underwriting, loan structuring, and monitoring.

- Additionally, one should understand the leverage facility’s terms as a mismatch between the fund’s borrowing and the fund’s credit investments can lead to a poor economic and / or liquidity outcome.

- Assessing the cost of debt capital is crucial, considering factors like structure, maturity, covenants, and whether the fund's leverage is floating or fixed. This analysis helps determine if the risk-return spread justifies the leverage used or if it merely serves as a fee-generating mechanism.

1 The Private Credit Boom

The Universe of Private Credit Strategies has been Expanding

Source: Prequin - As of December 31, 2022


Comparison of Overall Performance

 Source: Cambridge Associates. As of December 31, 2022.

Fund Structure and Vintage

Is the fund open-ended or fixed-term? If fixed-term, what is the duration? Does the fund yield or recycle returns until the harvest period?

- The fund's structure should align with the investor's goals, considering factors like liquidity, risk, and the desired yield. Understanding the vintage of fund assets and the fund's structure provides insights into potential risks and benefits.

What is the average age of the portfolio, or is this a new vintage fund?

- Given recent interest rate fluctuations, understanding the issuance date of existing loans is crucial. Investing in a new vintage fund can offer advantages, including exposure to a higher interest rate and a more robust covenant environment.

Request the typical breakdown of key loan characteristics.

- Examining loan term, interest rate type, fixed vs floating rate, call protection, and amortization details is essential for assessing risk and aligning with investor preferences. Understanding the source of returns, including cash interest, PIK, OID, and other forms of non-cash income, provides a comprehensive view of income streams.

What is the target size of the loans the fund is investing in?

- Loan size can impact competitiveness, with larger loans often attracting more players and potentially leading to a reduction in protective measures.

Loan Origination

What percentage of the portfolio is directly originated, and what percentage is invested through participations?  What percentage is originated through an investment banker or broker vs. direct?

- Understanding the manager's role in loan originations helps assess potential additional fees and the fund's level of involvement in sourcing deals.

Fee Structures

Does the fund charge management fees on contributed capital or commitments, and on assets or equity? Does the fund charge performance fees on unrealized returns?

- Examining fee structures ensures alignment with investor interests, preventing excessive fees on assets and addressing potential risks associated with charging performance fees on unrealized returns.

These questions serve as a starting point for investors exploring direct lending within the broader realm of private credit. Further discussions on overall strategy, origination processes, underwriting, loan structuring, monitoring, and workout experiences are encouraged to gain a comprehensive understanding before making investment decisions. Private credit involves risks of loss and you are encouraged to consult with a professional advisor.

  1. Private Credit Is Giving Investors Better Returns Than Private Equity, December 4, 2023.
  2. According to data provider Preqin as of October 2023.
  3. Bloomberg, as of September 2023.

This document and the information contained herein is not and must not be construed as an offer to sell securities and is qualified in its entirety by the fund’s private placement offering memorandum. Certain statements included in this presentation, including, without limitation, statements regarding the fund’s investment goals, underlying investment strategies, and statements as to the investment adviser’s beliefs, expectations or opinions are forward-looking statements within the meaning of section 27a of the securities act of 1933 (the “Securities Act”) and section 21e of the securities exchange act of 1934 (the “Exchange Act”) and are subject to risks and uncertainties. The factors discussed herein and throughout this presentation could cause actual results and developments to be materially different from those expressed in or implied by such forward-looking statements. Accordingly, the information in this presentation cannot be construed as to be guaranteed.

Privately offered investment vehicles commonly called hedge funds or private equity funds (“Private Funds,” which include fund of funds) are unregistered private collective investment funds that invest and trade in many different markets, strategies, and instruments (including securities, non-securities, and derivatives). There are substantial risks to investing in Private Funds. You could lose all or a substantial portion of your investment in a Private Fund. You must have the financial ability, sophistication, experience, and willingness to bear the risks of an investment in a Private Fund. An investment in a Private Fund entails risks that are different from more traditional investments and is not suitable or desirable for all investors. Only qualified eligible investors should invest in Private Funds. You should obtain investment and tax advice from your advisers before deciding to invest.

The Fund(s), General Partner, and Investment Adviser have not been recommended or endorsed by any federal or state securities commission or regulatory authority. Furthermore, the foregoing authorities have not reviewed this document and as such have not confirmed the accuracy or determined the adequacy of this document. Any representation to the contrary is a criminal offense.

Any statements about, or presentation of, performance information relating to KPC Funds or Underlying funds or indices are presented for illustration purposes only and are not intended nor may they be construed as indications, predictions, or projections of future performance of the fund or any manager. The fund(s) may be newly formed and may have little or no historical performance record, and the performance data presented herein may not be considered a substitute for the fund’s lack of historical performance.