Investment Committee Briefing · ~5 min read
This briefing is a practical instrument, not an argument. It assumes the committee has already decided private credit belongs in the portfolio in some size, and turns to the harder question: how to underwrite the structure rather than the yield. The organising principle is simple. The reported return on a private-credit allocation blends three things — manager skill, a leverage premium, and an illiquidity-and-opacity premium — and only the first is worth paying active fees for. Every item below exists to separate them, or to make sure the liquidity and valuation assumptions survive a downturn the asset class has not yet experienced.
From the allocator's seat
Three disciplines should frame the whole exercise. First, treat semi-liquid private credit as illiquid, full stop: quarterly redemption windows are contingent and were gated across multiple funds in early 2026. Second, treat manager-supplied marks as inputs to be verified, not facts — these are Level 3, model-marked assets, and their reported smoothness understates risk by construction. Third, look through the fund to the four layers of leverage (borrower, fund, subscription/NAV lines, rated feeders) and to the bank financing lines behind them, because the same loan may already sit elsewhere in your book via your bank and insurer holdings.
Questions for investment committees
Manager and underwriting due diligence - How was this manager's track record built — how much of the return is origination skill versus fund-level leverage and subscription-line IRR enhancement? Ask for returns gross and net of all leverage. - Has the manager underwritten through a full default cycle, or only in the post-2010 benign environment? Who runs workouts, and have they done so at scale? - What is the portfolio's borrower leverage distribution (debt/EBITDA), and what share sits above six times? What share of borrowers had negative EBITDA at origination? - What is the sector and single-name concentration? What is the largest position as a share of the fund?
Valuation and transparency - Who sets the marks? Is there a genuinely independent third-party valuation, or does the manager value its own book? How frequently, and with what audit? - What is the current gap between the fund's marks and comparable public credit (broadly syndicated loans, BDC discounts to NAV)? A persistent or widening gap is a smoothing signal. - What share of investment income is now payment-in-kind, and what is the trend? Above the ~8% BDC-average level, treat PIK as a forbearance gauge, not income. - What share of the portfolio has been through a distressed exchange or "liability management exercise," and how are those positions marked?
Layered leverage - What is fund-level leverage, and separately, what is the size of subscription and NAV financing lines? What are their covenants and margin triggers? - For any rated-feeder or insurance-linked access, what is the basis for the rating, and how does it compare to an internal regulatory or agency assessment? Inflated private-credit ratings have been flagged by regulators. - Which banks provide the fund's financing lines, and do we also hold those banks? Where does this exposure already appear in our consolidated book via insurers and banks?
Covenant and documentation - What is the covenant package — maintenance covenants, or covenant-lite? Covenant-lite first-lien loans have historically recovered around 57% versus roughly 66% for covenanted loans. - What lender protections exist against collateral leakage, drop-down transactions and priming? What are the EBITDA add-back and definition terms? - Where do we sit in the capital structure, and what is the realistic recovery assumption in a downturn — not the benign-cycle recovery?
Our own liquidity - If this vehicle gates, what is the knock-on to our cash-flow, rebalancing and any obligations (benefit payments, capital calls elsewhere)? Have we modelled gates being invoked precisely when we most need to redeem? - Are we relying on this sleeve as quasi-cash anywhere in the plan? If so, reclassify it as illiquid. - Under a 20% NAV mark-down coinciding with a public-market drawdown, what is the denominator effect, and would we be forced to sell liquid assets at the worst time?
Signals to watch (ongoing monitoring)
After commitment, the committee should monitor a short, fixed set of indicators each quarter: the PIK share of income; the gap between fund marks and public-credit equivalents; redemption-gate invocations across the manager's vehicles and peers; distressed-exchange volumes and conversion to hard defaults; and any disclosed strain in the fund's bank financing lines. A material move in two or more should trigger a review of sizing, not merely a note in the minutes.
Bottom line
The defensible posture is to size private credit for the downturn the committee has not seen, and to underwrite the structure, not the headline yield. Concretely: pay active fees only for demonstrable origination and workout skill; verify marks independently and read PIK and the mark-to-public gap as risk signals; look through all four leverage layers and the bank financing chain; insist on covenant protection and realistic recovery assumptions; and stress your own liquidity assuming gates close exactly when you want them open. A committee that can answer the questions above can size the allocation with confidence. A committee that cannot is buying the yield without understanding what it has agreed to hold.
Not investment advice.
Sources and Further Reading
- Report on Vulnerabilities in Private Credit — Financial Stability Board, 6 May 2026. Link: https://www.fsb.org/uploads/P060526.pdf Relevance: Authoritative inventory of the leverage, liquidity-mismatch, valuation and interconnectedness risks the checklist tests for.
- "Why Do Firms Borrow Directly from Nonbanks?" — Chernenko, Erel, Prilmeier, Review of Financial Studies 35(11), 2022 (SSRN 3220527). Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3220527 Relevance: Grounds the borrower-leverage and underwriting-quality questions in evidence on nonbank borrower selection.
- "Private Credit: The Rising 'Defaults'" — S&P Global Market Intelligence, July 2025. Link: https://www.spglobal.com/content/dam/spglobal/mi/en/documents/news-insights/research/MI_0725_private-credit-the-rising-defaults.pdf Relevance: Source for PIK prevalence and distressed-exchange data behind the valuation and monitoring items.
- "Life Insurers' Private Credit Investments and Annuity Market Share Capture" — Federal Reserve Bank of Chicago, Working Paper 2025-09. Link: https://www.chicagofed.org/-/media/publications/working-papers/2025/wp2025-09.pdf Relevance: Basis for the rated-feeder, affiliated-fund and insurer-linkage due-diligence questions.
- "Private Credit Confronts the Limitations of the Semi-Liquid Label" — WealthManagement.com, 2026. Link: https://www.wealthmanagement.com/alternative-investments/private-credit-confronts-the-limitations-of-the-semi-liquid-label Relevance: Evidence for the early-2026 redemption gates underpinning the liquidity-stress section.
Investment Committee Briefing. AI-assisted; editorially reviewed before release. Not investment advice.