Private debt funds are investment vehicles that raise capital commitments through closed-end funds and make senior loans directly to middle-market firms [2]. Due diligence is a crucial part of the private debt investment process [1]. Here are some key aspects of private debt due diligence:
– Fund Sourcing: Private debt funds can be sourced through various channels, including investment consultants, fund-of-funds, and direct outreach to fund managers [1].
– Investment Strategy: Due diligence should include a review of the fund’s investment strategy, including the types of loans it makes, the industries it focuses on, and the geographic regions it operates in [1].
– Risk Management: Private debt funds should have a robust risk management framework in place to identify, monitor, and mitigate risks associated with their investments [1].
– Legal Documentation: Due diligence should include a thorough review of corporate documents and any past or ongoing legal litigations [4].
– Creditworthiness: Private debt funds should assess the creditworthiness of potential borrowers, including their financial statements, credit history, and ability to repay the loan [4].
– ESG Considerations: Environmental, social, and governance (ESG) factors are becoming increasingly important in private debt due diligence. The Principles for Responsible Investment (PRI) has released a private debt ESG due diligence template for limited partners (LPs) [5].
Private debt funds can be an alternative to bank lending and provide investors with exposure to the more bond-like returns occurring from private debt as an asset class [6].
Citations:
[1] https://caia.org/sites/default/files/7_private_debt_2-26-18.pdf
[2] https://bfi.uchicago.edu/insight/research-summary/a-survey-of-private-debt-funds/
[3] https://www.top1000funds.com/2023/06/compenswiss-the-due-diligence-process-behind-a-new-private-debt-allocation/
[4] https://www.fuse-capital.com/en/blog/due-diligence-in-private-debt
[5] https://www.newprivatemarkets.com/in-brief-pri-releases-private-debt-esg-due-diligence-template-for-lps/
[6] https://www.prestigefunds.com/know/private-debt/