Funds specializing in a single asset class face pressure to deploy capital, creating a moral hazard. They first sacrifice price, then covenants, and finally fundamental lending rights to rationalize doing the next deal, leading to concentrated risk in assets deemed "quality."

Unlike institutional drawdown funds that call capital as needed, many retail private credit funds take investors' cash upfront. This creates immense pressure to deploy capital quickly to avoid performance drag, leading to weaker underwriting standards (e.g., weaker covenants, lower rates) in a hyper-competitive environment.

Historically, net lease investing prioritized tenant creditworthiness. Now, sophisticated investors argue that equally rigorous underwriting of the underlying real estate is a critical differentiator. This dual-focus approach is essential for enhancing long-term returns and mitigating risk in a more competitive market.

A key risk identified in a Bloomberg survey is worsening underwriting standards. This is driven by new entrants ('tourists') to the private credit market who may be offering looser loan terms and conditions in an effort to quickly build their portfolios.

The underwriting quality in private credit is declining. Key red flags include lenders accepting "EBITDA add-backs"—projected, unrealized earnings improvements—and allowing borrowers to retain more proceeds from asset sales. These terms signal a shift in negotiating power to borrowers and rising risk.

Public market data and backward-looking metrics frequently obscure micro-market challenges. By having credit underwriting teams review deals alongside internal equity asset managers who manage existing property nearby, lenders uncover ground-level realities that financial models miss—such as local tenants shifting toward transit stations or industrial trucks needing inefficient left turns off freeways.

Despite weak documentation, private credit deals proceed because lenders underwrite the sponsor relationship, not the legal text. For a top-tier sponsor in a preferred industry, lenders will forgo strong covenants and rely on their ongoing relationship as the primary form of protection.

While leverage multiples are similar across the market, Neuberger targets companies acquired at high purchase price multiples (avg. 17x). This strategy results in a significantly lower loan-to-value ratio, providing a larger equity cushion and reducing the lender's ultimate risk.

A sign of eroding discipline, private credit underwriters are beginning to offer covenant-lite deals, once unthinkable in a market known for strong investor protections. This shift indicates that intense competition for deals is forcing lenders to lower underwriting standards, mirroring a late-cycle trend previously seen in public markets.