In a non-control deal, an investor cannot fire management. Therefore, the primary diligence focus must shift from the business itself to the founder's character and the potential for a strong partnership, as this relationship is the ultimate determinant of success.

Companies are willing to pay a 150-200 basis point premium for private credit to gain a strategic partner who provides bespoke financing, governance, and expertise for complex needs like carve-outs. This partnership value proposition distinguishes it from transactional public markets.

While default rates are a concern, the bigger issue is that loss-given-default will be higher. Historically, bank loans recovered 70% because covenants allowed early intervention. Today's covenant-lite private credit loans prevent this, likely pushing recovery rates down from 70% to the 40-50% range.

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.

The frequency of aggressive Liability Management Exercises (LMEs) is declining. Sponsors and lenders recognize they operate in a small world and must return to the same markets for future financing. Damaging relationships is no longer tenable, leading to more rational, pro-rata solutions instead of punitive, non-consensual deals.

Companies opt for more expensive private credit over public markets for non-price benefits like speed, customized structures, and a direct lender relationship. This simplifies future renegotiations, a critical advantage over broadly syndicated public loans.

When a corporate client is acquired by private equity and requires higher leverage, the bank risks losing the entire relationship. By partnering with a private credit fund to handle the loan, the bank can keep the client and all associated high-margin fee-based services like treasury management.

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.

Private credit is no longer just for borrowers who can't get a bank loan. It's now a preferred choice for institutional players seeking speed, flexibility, and a single point of contact. The value has shifted from just providing capital to offering a superior, less bureaucratic process than traditional lenders.