Four Essential Tips for Navigating Private Credit

In today’s financial world, private credit is a growing space, but it’s not without its risks. If you’re an advisor, there are four things you should always keep in mind when looking at private funds.

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1. Manager Registration
First, never invest in any private fund where the manager isn’t registered with the Securities Commission. This is a basic check. Go to the Canadian Securities Administrators website, type in the manager’s name, and you’ll know right away. It’s a simple way to avoid a lot of unnecessary risk.

2. Liquidity Mismatch
Second, look out for liquidity mismatches. If a fund says you can get your money in 30 days, but most of its assets are buildings, ask yourself—how? Does it make sense that the underlying non-liquid assets like a building can actually be sold in time to meet the redemption period of 30 days? How is that possible? That’s a red flag. Plus, there’s often leverage involved which further increases the risk that you can’t get your money back when you need it.

3. Conflicts of Interest
Third, avoid private funds where the manager keeps the loan fees charged to the borrower and only gives the investors the interest portion. This is a common practice and a huge conflict of interest which should be avoided. In my experience, conflicts of interest like this can be tough to manage, especially when times get tough. Stick with managers who provide full transparency on the borrowers’ fees charged and where those fees go to you, the private fund investor.

4. Sales Alignment
Finally, be careful about how liquidity is being sold. If a wholesaler is promoting liquidity in the non-liquid private fund because they have availability to a credit facility, you’ve got to ask—at whose expense? Who pays the interest on those loans? The inventors that didn't redeem? Yes. 

“The future liquidity of all non-liquid private funds is alternatively determined by the people who sell the fund, how they sell it, and to whom.” W.A. Robinson, CFA

At Steepe & Co., we work closely with advisors and pension consultants and have been focused on private debt, credit and mortgage funds in Canada and the U.S. for 18 years.

Reach out anytime for more information! Email me at michael@steepeco.com

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