In private credit, institutional investors face their biggest risk not in the asset class itself, but in selecting the general partner. Interviews with private market insiders suggest the real danger is a lack of scrutiny of managers. As one manager sums it up: “If any, the bubble in private credit is at the manager level.”
Since JPMorgan’s Jamie Dimon likened failing private loans to “cockroaches,” the debate around private credit appears to have taken on a life of its own. To understand the risks beyond the headlines, Investment Officer asked managers and advisers what limited partners (LPs) should monitor when committing capital. Their consensus is clear: investors must scrutinize how managers underwrite and communicate, as transparency often weakens after capital is committed.
When situations become difficult, “the tone changes once the money’s wired,” said Aleksey Chernobelskiy
, founder and CEO of GP-LP Match. His firm connects general partners (GPs) seeking capital with allocators. He calls it one of the most common complaints. “You start asking questions and you don’t hear back. That’s when LPs realize maybe they should’ve done more diligence up front.”
“If you’re a major investor they can’t afford to lose, they’ll answer your calls. If you’re small, good luck getting a call back once you start asking tough questions.”
Other advisers describe a similar pattern. “If you’re a major investor they can’t afford to lose, they’ll answer your calls. If you’re small, good luck getting a call back once you start asking tough questions,” said a senior adviser at a large private markets consultancy in New York, speaking on condition of anonymity.
Access depends heavily on ticket size, he said. Established direct lenders with long relationships and proven execution get first pick, he said. Newer entrants often receive lower-quality opportunities. “If you’re trying to break into the direct-lending space, sponsors trying to ‘develop a relationship’ are not going to give you their best assets,” he said. “Those go to their top relationships.”
The art of allocating
Effective allocators start with the basics: track record, alignment of interest, fees, portfolio construction and risk controls. But they do not stop there. “They go line-by-line through underlying credit agreements, not just the fund documents, because that is where the GP’s discipline is exposed,” the senior advisor said.
LPs should sit down with the GPs and read the loan agreements together. “Not just the fund documents governing the GP, but the actual underlying credit documents. I remember showing a client a legal clause that had a five-page definition of ‘EBITDA’. That tells you a lot. It’s the art of allocating: knowing the reputation of the people at the firm you work with, and what a good document looks like.”
Chernobelskiy said his firm looks at what’s actually in the portfolio, “whether those loans are paying current or accruing, what the liabilities look like versus market value.” Presentations can look glossy, but the details often reveal a different reality. Still, he is frank about the limits of transparency. “Either the GP gives it to you, or you don’t get it,” he said. “Once you invest, it’s more of a legal and trust relationship.”
Factors such as the importance of the capital, the potential to join a subsequent fund and specific contract rights determine how transparent a manager will be. “Many times, the reporting is… let’s just say, not great. That’s the beauty and the challenge of private markets.”
Underwriting the GP
Chris Gudmastad, head of private credit at Natixis boutique Loomis Sayles, said investors must treat GP due diligence as seriously as credit due diligence. “Just like we underwrite a credit, an LP’s job is to underwrite the GP,” he said.
While recent high-profile problems in the credit markets are not limited to private credit, they do feel “late-cycle,” said Gudmastad. “In some of the latest default cases, a more robust underwriting process could have prevented at least part of the losses,” he reasoned. “Fraud is always harder to protect against, but stronger underwriting still helps.”
Gudmastad, who used to be an LP himself, advises allocators to review processes directly, compare managers and, where possible, sit in on parts of the underwriting process. Smaller LPs often rely on consultants, which he said is appropriate when internal resources are limited.
Independent tools
Independent tools to support LPs as they underwrite their managers are beginning to emerge as well. Romain Bégramian, CEO of GP-Score, a firm that analyzes and compares the value-creation capabilities of PE managers, said his firm avoids GP self-reporting entirely. Instead, he requests detailed material from portfolio companies themselves, including roadmaps, action plans, dashboards and KPI charts.
His focus is on operational value creation, not reported marks. He urges allocators to stay away from GPs that have a one-size-fits-all approach to operational alpha. “They make avoidable mistakes that are detrimental to performance,” he said.
‘Fix your cockroaches’
Regulatory pressure may help, but GP discipline remains the core issue. The DOJ’s comments suggest valuation practices will face higher scrutiny. But the practitioners interviewed say solving valuation gaps will not resolve the underlying challenge: access and visibility.
“If your private-credit allocation is locked in and you have no reporting rights, I have bad news: you just have to wait it out. You can’t perform a forensic audit on a fund you don’t control,” said Chernobelskiy.
Nonetheless, he is not afraid of cockroaches. “If one shows up, you call the exterminator, fix it, and move on. Maybe it costs a few basis points, but it’s not the end of the world. Most LPs care about long-term returns. They know some deals won’t work out. The question is: where should I deploy next? That’s what matters most.”
In Gudmastad’s view, the larger capital allocators do their job well. They “definitely underwrite thoroughly and carve out time to do it,” he said. “It’s a partnership.”
“What has changed over the last ten years is that you have a lot of new entrants in private credit, and we haven’t had a real recession for some time,” Gudmastad said. “It will be very interesting to see what happens if we do go through a genuine downturn without central bank intervention.”