Understanding Credit Risk in Private Markets

A deep dive into credit risk assessment, mitigation strategies, and monitoring frameworks for private credit investments.

Understanding Credit Risk in Private Markets

Credit risk assessment is fundamental to successful private credit investing. Unlike public markets, private credit requires extensive due diligence and ongoing monitoring capabilities.

Credit Risk Components

Probability of Default (PD)
– Financial strength analysis
– Management quality assessment
– Industry and competitive positioning
– Macroeconomic factors

Loss Given Default (LGD)
– Collateral quality and coverage
– Seniority of debt structure
– Recovery procedures and timing
– Legal jurisdiction considerations

Due Diligence Framework

Financial Analysis
– Historical performance trends
– Cash flow stability and predictability
– Capital structure optimization
– Covenant compliance testing

Business Quality Assessment
– Market position and competitive advantages
– Management team track record
– Operational efficiency metrics
– ESG factors and sustainability

Risk Mitigation Strategies

Structural Protection
– **Senior secured** positioning
– **Asset-based** collateral packages
– **Covenant packages** with early warning systems
– **Amortization schedules** reducing exposure over time

Portfolio Management
– Diversification across sectors and vintages
– Position sizing based on risk-return profile
– Active monitoring and early intervention
– Workout and restructuring capabilities

Monitoring and Reporting

Effective credit risk management requires:
– Monthly financial reporting
– Quarterly business updates
– Annual covenant testing
– Continuous market intelligence

Understanding and properly managing credit risk is essential for generating attractive risk-adjusted returns in private credit markets.