Template

Private Credit Fund Due Diligence Checklist

A direct-lending and specialty-finance checklist focused on underwriting, workouts, structure, and downside protection.

What this template is for

Private credit diligence requires depth on underwriting discipline, recovery experience, structural protections, valuation, liquidity, and how the manager behaves when credits deteriorate. This checklist is built for direct lending, mezzanine, distressed, opportunistic credit, and specialty finance strategies.

When LP teams use it

Direct lending fund evaluation
Distressed credit fund evaluation
Mezzanine and junior capital fund evaluation
Specialty finance and asset-based lending evaluation
Asset-backed finance evaluation
Re-up evaluation for an existing private credit manager
IC preparation for a private credit commitment

The template

Strategy and lending profile

Senior, unitranche, junior, mezzanine, distressed, opportunistic, or hybrid
Sponsored vs. non-sponsored mix
Borrower size and EBITDA range
Target borrower type
Sector concentration
Geographic concentration
Loan size range
Hold size vs. underwritten size
First-lien / second-lien / unsecured mix
Cash-pay vs. PIK exposure
Recurring revenue, asset-backed, or cash-flow lending focus
Where this fund sits in the firm's product set
What makes the strategy difficult to replicate

Sourcing and origination

Direct origination vs. club deals vs. participations
Sponsor channel relationships
Non-sponsored sourcing channels
Repeat borrower or sponsor relationships
Origination volume vs. actual deployment
Win rate and why deals are won
Deals passed on and why
Evidence of proprietary or advantaged sourcing
Use of intermediaries or banks
Ability to maintain discipline during competitive periods
Pipeline quality vs. target deployment pace

Underwriting and credit process

Credit committee structure
Approval rates
Required sponsor or borrower diligence
Average loan-to-value at origination
Average debt-to-EBITDA at origination
Interest coverage at origination
Fixed charge coverage
Base case, downside case, and liquidation case assumptions
Collateral analysis, if applicable
Borrower reporting requirements
Quality of earnings review process
Legal diligence process
Industry expertise and credit-cycle experience
Who can approve exceptions to underwriting standards

Covenants and documentation

Maintenance vs. incurrence covenant mix
Financial covenant types
Covenant headroom at close
Equity cure provisions
Reporting covenants
Borrower information rights
Collateral package
Guarantees, pledges, and security interests
Intercreditor arrangements
Documentation control: agented vs. non-agented
Amendment and waiver history
Evidence of covenant erosion in recent vintages
How covenant breaches are monitored and escalated

Portfolio construction

Position sizing and concentration limits
Maximum exposure per borrower
Maximum exposure per sponsor
Sector concentration limits
Geographic concentration limits
Diversification by borrower, sponsor, sector, and vintage
Hold-to-maturity vs. trading approach
Floating vs. fixed rate mix
Average maturity and duration
Weighted average spread
Weighted average yield
Expected gross yield vs. net return target
PIK income exposure limit
Watchlist exposure limit
Non-accrual exposure limit
Portfolio ramp plan

Risk management and monitoring

Borrower reporting cadence
Internal credit rating system
Watchlist process
Early warning indicators
Portfolio review cadence
Triggers for escalation
Use of third-party data or valuations
Borrower liquidity monitoring
Sponsor support monitoring
Covenant compliance monitoring
Amendment and waiver approval process
Documentation of credit deterioration
How manager distinguishes temporary stress from impairment
Examples of credits moved to watchlist and why

Workouts and recoveries

Non-accrual rate history
Default rate history
Realized loss rate
Recovery rate
Number of restructurings completed
Restructuring experience by senior team member
Internal workout team vs. external counsel model
Control rights in stressed situations
Ability to lead restructurings or only participate
Examples of recoveries through prior cycles
Worst realized losses and lessons learned
Time to recovery
Use of amendments, waivers, extensions, and rescue capital
How the manager behaves when sponsors resist support

Leverage and fund structure

Use of fund-level leverage
Facility size
Advance rate
Borrowing base mechanics
Asset coverage tests and triggers
Covenants on fund-level facilities
Lender concentration
Maturity of leverage facilities
Open-ended vs. closed-ended structure
Redemption mechanics, if open-ended
Gates, queues, and suspension rights
NAV facility use
Subscription line use
Co-investment vehicles
Rated note feeders or structured vehicles
Cross-collateralization or asset segregation
Stress case impact of fund-level leverage

Valuation and marks

Valuation policy
Frequency of valuation
Use of internal vs. external marks
Valuation committee composition
Third-party valuation provider, if any
Treatment of performing but stressed credits
Treatment of PIK income
Realized vs. mark-based performance
Mark consistency through stress periods
Examples of write-downs and timing
Comparison of marks to eventual recoveries
Any history of stale or delayed markdowns

Performance

Gross and net yield by vintage
Gross and net IRR by vintage
TVPI, DPI, and loss-adjusted returns
Current income vs. total return split
Realized vs. unrealized performance
Realized losses by fund
Non-accrual history by fund
Performance by strategy sleeve
Performance by sector
Performance by sponsor vs. non-sponsor exposure
Comparison to direct lending, high yield, leveraged loan, and broader credit benchmarks
Performance excluding fund-level leverage impact
Performance under rate increases or spread widening

Terms specific to credit

Management fee rate and basis
Carry, hurdle, catch-up, and waterfall
Preferred return structure
Origination, structuring, amendment, monitoring, and prepayment fees
Fee offset to LPs
Recycling of principal
Reinvestment period
Treatment of PIK income in carry waterfall
Treatment of defaulted or non-accrual assets in fee base
Fund expense allocation
GP commitment
Key-person provisions
Removal rights
LPAC rights
Reporting rights
Side letter asks
Any terms that deviate from market

Operational due diligence

Fund administrator
Auditor
Counsel
Tax advisor
Loan operations process
Cash management process
Trade settlement process, if applicable
Borrower reporting collection process
Valuation controls
Compliance program and CCO
Cybersecurity and business continuity
Conflicts policy
Co-invest allocation policy
Allocation between funds, SMAs, and co-invest vehicles
Past or pending litigation, regulatory, or compliance matters

Re-up specific questions, if applicable

What changed since the prior fund?
Has the strategy moved up or down the risk spectrum?
Has borrower quality changed?
Has leverage increased?
Have covenants weakened?
Has fund-level leverage increased?
Has deployment pace changed?
Has the manager shown workout discipline?
Did prior loss expectations prove accurate?
Were marks adjusted promptly when credits deteriorated?
Has performance come from spread, leverage, PIK, marks, or realized gains?
Should we increase, maintain, reduce, or pass?
What would make us not re-up?

Red flags and mitigants

Low loss rate with limited credit-cycle experience
High returns driven by fund-level leverage
Increasing PIK exposure
Weak or disappearing maintenance covenants
Aggressive marks on stressed credits
Thin workout history
Rapid AUM growth relative to sourcing capacity
Strategy drift into riskier credit
High sponsor concentration
High sector concentration
Open-ended structure with illiquid assets
Redemption terms that may not match asset liquidity
Fee treatment that rewards unrealized or PIK income
Weak reporting on watchlist and non-accrual credits
Identified concern
Severity: low / medium / high
Manager explanation
LP team view
Mitigant
Follow-up owner
Status

Final diligence conclusion

One-paragraph investment view
Primary reason to invest
Primary reason not to invest
Biggest underwriting question
Biggest downside risk
Open diligence items
Recommended commitment size
Recommendation: proceed / proceed with conditions / defer / pass
Conditions to close
Items to monitor after commitment
Reviewer confidence level

Common mistakes

Underweighting recovery experience because the loss rate looks low
Treating mark-based returns as realized performance
Ignoring covenant erosion in current vintages
Underestimating the impact of fund-level leverage on volatility
Failing to distinguish originations from secondary participations
Overlooking PIK income quality and how it flows through returns
Ignoring open-ended fund liquidity terms relative to underlying asset liquidity
Accepting 'senior secured' as a substitute for true downside analysis
Not asking how the manager handled its worst credits
Failing to separate spread income, leverage, marks, and realized recoveries in performance attribution

How Allocator Desk manages this in a live system

Creates a private credit diligence workflow with underwriting, covenant, leverage, valuation, and workout fields
Tracks non-accrual, watchlist, recovery, and restructuring commentary across quarterly letters and manager meetings
Surfaces covenant erosion, fund-level leverage, PIK exposure, and asset coverage trends over time
Maps credit-specific side letter terms, fee offsets, recycling, PIK treatment, and reporting rights into the obligations record
Links references, quarterly monitoring, annual meeting notes, and prior IC memos into the re-up decision
Preserves downside cases, red flags, mitigants, and reviewer conclusions for future monitoring and re-up reviews
Turns private credit diligence from a yield screen into a searchable record of underwriting judgment, downside protection, and manager behavior through stress