How to evaluate a private credit opportunity

Most investors spend more time researching a car purchase than a private credit investment.

That is not a criticism. It reflects something real; private credit is opaque by design. The information is not publicly available. The structures are complex. And the people selling these products are not always incentivised to make the risks legible.

But the questions that separate a well-structured private credit opportunity from a poorly structured one are not complicated. They are just rarely asked.

Here are the five that matter most.

Question 1: Who holds the security, and are they genuinely independent?

Every private credit product will tell you the investment is "secured." The word has become almost meaningless through overuse.

What matters is not whether security exists - but who holds it, and whether they are genuinely independent of the people managing your money.

A security trustee who is also the fund manager, or who has a commercial relationship with the borrower, does not provide real protection. They have a conflict of interest that will surface at exactly the wrong moment, when something goes wrong and decisions need to be made in the investor's interest rather than the manager's.

Genuine independence means a third party with no commercial stake in the outcome of the deal, holding a legal charge over the underlying asset, with the authority to act on behalf of investors without requiring permission from the fund manager.

Ask who holds the security. Ask how they are appointed. Ask what their relationship is with the manager. The answers will tell you almost everything you need to know.

Question 2: What is the loan-to-value ratio, and how was the asset valued?

The loan-to-value ratio tells you how much of the asset's value is sitting above your capital as a buffer.

If a property is worth £1,000,000 and the loan is £700,000, the LTV is 70%. That means the asset would need to fall 30% in value before your capital is at risk, assuming the valuation is accurate.

That last part matters more than the ratio itself. An independent valuation from a qualified surveyor is not the same as a developer's internal projection. In a stressed scenario, the valuation that counts is the one that reflects what the asset would actually sell for quickly - not its theoretical maximum value under ideal conditions.

Ask for the LTV. Ask who conducted the valuation. Ask what the stress-tested value looks like if the asset needed to be sold in 90 days.

Question 3: What is the exit strategy, and is it contractually defined?

Private credit investments have defined terms (typically 12 to 24 months). But the term is only as meaningful as the exit strategy behind it.

How does the borrower intend to repay? Is it through a sale of the asset, a refinance, or ongoing revenue? And is that exit strategy realistic given current market conditions, not the market conditions that existed when the deal was structured?

A vague exit strategy is one of the most common red flags in private credit. Developers are optimists by nature. They believe their project will sell quickly, at the asking price, in any market. The lender's job is to stress-test that assumption rigorously.

Ask what the primary exit strategy is. Ask what the secondary exit is if the primary fails. Ask whether the exit timeline is contractually binding or aspirational.

Question 4: What is the track record, and how has it been verified?

Track record in private credit is easy to claim and difficult to verify.

Anyone can say they have deployed capital successfully. The questions that reveal the truth are more specific. How many deals have been completed? What was the average term? Were all interest payments made on time and in full? Were there any defaults, extensions, or restructurings - and if so, how were they handled?

Past performance is not a guarantee of future results. But a manager who has navigated a full credit cycle - including deals that did not go to plan - and who can show you exactly what happened and how investors were protected, is a fundamentally different proposition from one with a short track record in a benign market environment.

Ask for a complete deal history. Ask specifically about any extensions or restructurings. The way a manager handles problems tells you far more than the deals that went smoothly.

Question 5: How are you being compensated, and where are your interests aligned with mine?

Fee structures in private credit can be complex, and complexity often obscures conflicts of interest.

The clearest alignment of interests is co-investment. When the manager deploys their own capital alongside yours in every deal, their financial interest is identical to yours. They lose when you lose. They win when you win.

When a manager earns fees regardless of performance (through management fees, arrangement fees, or exit fees paid by the borrower) their incentives are not fully aligned with investor outcomes. That does not make the investment bad. But it means you are relying on their integrity rather than their self-interest to protect you.

Ask whether the manager co-invests in every deal. Ask for a complete breakdown of all fees, paid by investors and by borrowers. Ask what happens to the manager's economics if a deal extends or defaults.

These five questions will not make you an expert in private credit.

But they will tell you, quickly and clearly, whether the opportunity in front of you has been structured with investor interests at the centre, or whether it has been structured around something else entirely.

The answers you receive matter less than how they are given. A manager who answers these questions directly, with documentation, and without defensiveness, is demonstrating something important about how they will behave when things get difficult.

That is ultimately what you are evaluating.

This article is for informational purposes only and does not constitute investment advice. Capital is at risk. Please seek independent financial advice before making any investment decision.