The fund side

The lender in most private credit deals is a fund run by an asset manager. The manager is the general partner (GP): it finds, makes and watches the loans. The investors are limited partners (LPs): pension funds, insurers, endowments and others who commit money but don't run anything.

In a traditional closed-end fund, an LP commits a sum, say $50m, and the GP calls that money in stages as it finds loans (capital calls). After an investment period of a few years the fund stops making new loans, collects interest, and returns money as loans are repaid. Other structures: a separately managed account (SMA) is a portfolio run for one large investor under its own rules, such as an insurer that wants only certain kinds of loans. Evergreen funds have no fixed end and let investors in and out from time to time.

A business development company (BDC) is a US vehicle that lends to mostly private, mid-sized US companies and lets ordinary investors take part. BDCs are regulated under US investment company law, can be listed on an exchange or not, must invest most of their assets in eligible companies, and to avoid company-level tax they pay out most of their taxable income as dividends, so they're popular with income investors.

Managers earn two kinds of fee. The management fee is a yearly percentage, often around 1% to 1.5% of invested capital or net assets. The incentive fee is a share of the fund's income or profits, often around 10% to 20%, paid only once returns pass a hurdle (a minimum return to the investors). The exact terms vary a lot and are set in each fund's documents.

invested = 400_000_000
management_fee = invested * 0.0125
income = 36_000_000          # interest and fees after expenses
hurdle = invested * 0.06
# simplified: once income clears the hurdle (and any catch-up), 12.5% of all of it
incentive = 0.125 * income if income > hurdle / (1 - 0.125) else 0
print(round(management_fee), round(incentive))

Investors expect regular reporting: quarterly reports with each loan's status and valuation, the fund's net asset value, capital account statements showing what each LP has paid in and got back, and fees charged. Because private loans don't trade, the manager values them with a model and often has an outside firm review the values.

Before an investor commits, and often every year after, it sends a due diligence questionnaire (DDQ): a long list of questions about the manager. Who's on the team and who decides, the strategy and track record, how deals are sourced and approved, how loans are valued, risk management and limits, conflicts of interest, compliance, fees, operations, cyber security, and environmental and social policies. Pension funds, insurers, endowments and the consultants who advise them all send them.

Answering DDQs is repetitive work. Each investor uses its own template and wording, so the same twenty facts get asked two hundred different ways. Answers have to match what the manager said before and in its fund documents, be up to date (team changes, new numbers every quarter), and be checked by legal and compliance before they go out, because an investor relies on them. Managers keep a library of approved answers and adapt them; the AI course on financial documents covers how that can be automated safely.