The private credit market is flourishing, with approximately $1.7TN AUM of private credit assets. Over the past 15 years, the demand among LPs has grown as the asset class evolved from a speciality product into a mainstream source of financing.

While the appeal is mainstream, the requirements are not. Private debt is unrated and less liquid, and the terms are more flexible, all of which add to its opacity and unpredictability. As a result, the manager’s diligence in credit surveillance and quality of their in-house expertise needs to be a central consideration for investors.

The role of covenant monitoring

Covenants protect the investment by ensuring the borrower adheres to a set of conditions that are designed to minimise credit risk. Strict compliance is crucial to maintaining loan performance and trust between lenders and borrowers. Advanced covenant monitoring plays a pivotal role in early detection of potential covenant breaches, enabling lenders to practice proactive management to avoid costly defaults and foster close relationships between lenders and borrowers.

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