Alignment of interest: what advisers should look for in private credit funds

Private credit is built on trust – between investor, manager, and borrower. But in practice, trust alone is not enough. It needs to be supported by structure. Alignment of interest is what ensures that all parties are working toward the same outcome: protecting capital and delivering sustainable returns.

For advisers, understanding alignment is not a theoretical exercise. It is a practical way to assess how a manager is likely to behave under pressure, particularly when market conditions become more challenging. 

Fees: simplicity and clarity matter
Fee structures are one of the clearest indicators of alignment. Transparent, straightforward fee arrangements allow advisers to understand exactly how returns are generated and shared.

Complex or layered fee structures can obscure true performance and create incentives that prioritise capital deployment over capital discipline. For example, structures that reward managers primarily for funds under management rather than outcomes may encourage faster deployment into marginal deals.

Well-aligned managers are typically compensated for performance, not just activity. Simplicity in fees is often a sign of discipline.

Manager capital at risk
Co-investment is one of the strongest signals of alignment. When managers invest their own capital alongside clients, their outcomes become directly linked.

This changes behaviour. Investment decisions are more likely to be conservative, underwriting standards more rigorous, and risk management more proactive. Losses are not theoretical – they are shared.

For advisers, manager capital at risk provides a tangible demonstration of conviction. It reinforces that the same framework used to assess client capital is applied internally.

Governance: independent oversight
Alignment is also shaped by governance. Independent investment committees, external administrators, and clearly defined decision-making processes provide important checks and balances.

Strong governance reduces the risk of conflicts of interest, particularly in areas such as related-party lending or valuation practices. It ensures that decisions are subject to challenge and scrutiny, rather than driven by internal incentives alone.

Transparency and governance are closely linked. Where governance is robust, disclosure is typically stronger.

Behaviour under pressure
Alignment is most visible when conditions become difficult. In periods of stress, well-aligned managers prioritise capital preservation over short-term returns. They maintain discipline, even if it means slower deployment or lower headline yield.

This is where structural alignment becomes behavioural alignment.

 Key learning
Alignment of interest is not defined by a single factor. It is the combination of fee structures, manager co-investment, and governance frameworks that determines whether managers and investors are truly working toward the same outcome.