Conducting due diligence is a crucial part of the private debt investment process. Here are some best practices for conducting private debt fund due diligence:
– Thorough Review of Investment Strategy: A thorough due diligence process 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.
– Robust Risk Management Framework: Private debt funds should have a robust risk management framework in place to identify, monitor, and mitigate risks associated with their investments.
– Legal Documentation Review: Due diligence should include a thorough review of corporate documents and any past or ongoing legal litigations.
– Creditworthiness Assessment: Private debt funds should assess the creditworthiness of potential borrowers, including their financial statements, credit history, and ability to repay the loan.
– 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).
– Review of Monthly Asset Reports: When conducting operational due diligence on real estate debt funds, recommended procedures include reviewing monthly asset reports, examining audited financial statements, substantiating IRR calculations, and confirming fund allocation in-line with strategies outlined in the prospectus.
– Expertise of Fund Managers: Successful debt fund managers typically have expertise in real estate credit training, loan work out experience, and commercial real estate (CRE) development. The more broad the experience of fund managers in all areas of CRE, the more likely they will make appropriate investment decisions in the first instance.
– Thorough Employee and Property Review: Due diligence should include a thorough review of employees and property.
– Expectation Management: Investors should have a clear understanding of what to expect from the due diligence process and the investment itself.
Overall, conducting thorough due diligence is crucial to mitigate risks and ensure that private debt investments align with investors’ goals and objectives.
Citations:
[1] https://caia.org/sites/default/files/7_private_debt_2-26-18.pdf
[2] https://www.lavenpartners.com/thought-leadership/real-estate-debt-funds-operational-due-diligence-a/
[3] https://www.top1000funds.com/2023/06/compenswiss-the-due-diligence-process-behind-a-new-private-debt-allocation/
[4] https://www.unpri.org/private-debt/responsible-investment-ddq-for-private-debt-investors/4071.article
[5] https://bfi.uchicago.edu/insight/research-summary/a-survey-of-private-debt-funds/
[6] https://www.fuse-capital.com/en/blog/due-diligence-in-private-debt