Transparency Matters
Investment Strategy - Investors should ensure the fund’s lending policy is well defined in the PDS/IM and it is not deliberately ‘opaque’ with a wide scope for risk. The fund should also have clear and measurable fund exposure limits in the PDS/IM that are monitored by an external trustee to ensure compliance.
Fund Structure - Non-blended funds (single loan type) provide significantly more transparency of risk than blended funds (multiple loan types). It’s the transparency of risk that is important here. Investors should also ensure the PDS/IM is clear on whether the fund is levered, if the fund allows related party loans, and whether the Investment manager can move loans between funds.
Loan Portfolio - Investors must be able to see the underlying loan book of the fund including the status of each loan. If you can’t see the loan book, how do you know if the risk adjusted return is good or bad? Look for Investment Managers that will show you the loan book and can provide you with detailed monthly loan reports.
Fees - Fee structures in private credit funds are notoriously hidden. Look for funds that have a transparent and simple fee structure outlined in the PDS/IM with no performance fees. The fund should not ‘pretend’ to share in loan establishment fees, and then take the same fee back via another fee mechanism.