A telecom financing company defrauded lenders including BlackRock's HPS of over $500 million by fabricating receivables from major carriers like T-Mobile. The entire scheme, involving forged contracts and spoofed emails, would have been exposed by a single phone call to verify the collateral, highlighting severe due diligence failures in the booming private credit market.

Unlike equity investors hunting for uncapped upside, debt lenders have a fixed return and are intolerant to losing principal. This forces them to be paranoid about downside risk and worst-case scenarios. Their diligence process is often more thorough and thoughtful, providing a different and rigorous lens on the business.

Unlike banks that react to fraud, Palmer Luckey's Erebor is proactively partnering with intelligence agencies from its inception. The goal is to design a system where fraud is nearly impossible, creating a moat that attracts legitimate, high-value clients while inherently repelling bad actors who prefer less scrutiny.

Private credit allows investors to act like chefs—deeply involved from ingredient sourcing (diligence) to final creation (structuring). Liquid market investors are like food critics, limited to analyzing the finished product with restricted access to information, which increases risk.

To avoid disastrous partnerships, propose a radical transparency exercise. Each party agrees to hire a private investigator to vet the other, then discuss the findings. This surfaces red flags and demonstrates a commitment to honesty, saving years of potential pain.

Recent "canary in the coal mine" cases like First Brands, often blamed on private markets, were not PE-owned and were primarily financed in liquid markets. In fact, it was private credit firms pushing for deeper diligence that exposed the issues, strengthening the argument that private credit offers a safer way to access the asset class.

Despite investor concerns about private credit, banks involved in the space feel reassured by their risk management strategy. They structure deals to be senior, are over-collateralized by hundreds or thousands of loans, and partner exclusively with established, prime sponsors, creating multiple layers of protection.

Centana Growth uses its deep diligence process to uncover operational insights for founders. In one case, they collaboratively identified a flaw in a company's core matching algorithm during a diligence session, leading to immediate improvements before the deal even closed. This reframes diligence as a value-add activity.

When considering debt, the most critical due diligence is not on deal terms but on the lender's character. Investigate how they have treated portfolio companies during challenging times. Partnering with a lender who will "blow you up" at the first sign of trouble is a catastrophic risk.