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.

When studying failed money management firms, WCM found that founders were unwilling to discuss their mistakes. The most valuable, unfiltered lessons about what truly went wrong came from conducting deep diligence with former employees of those organizations.

Early-stage deal diligence often fails due to inconsistencies in the overall story. Red flags include a lack of transparency, financials that don't add up, and misaligned team vision. These narrative cracks signal deeper issues more effectively than any single weak KPI.

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.

To combat fraud, some credit funds use the prospective borrower's due diligence deposit to fund deep background checks on founders and management as the very first step. Any past financial impropriety, no matter how old, results in an immediate rejection, making recent high-profile frauds avoidable.

While issues like token proliferation and weak value accrual are problematic, the fundamental reason investors have lost trust is the absence of standardized disclosures and regular reporting. Investors are effectively "flying blind" due to missing, incomplete, or ad-hoc data, which is the root cause of poor market structure.

An expert reveals two shocking statistics: 80% of new founders fail their first diligence attempt, and 85% of early-stage investors don't perform confirmatory diligence. This highlights a massive, systemic weakness and inefficiency in the startup ecosystem, creating significant risk on both sides of the table.

Hedge funds that short stocks are financially incentivized to find and publicize corporate wrongdoing early. They don't need 'proof beyond a reasonable doubt,' allowing them to flag issues like Super Micro's export violations months before the FBI could build a formal case, serving as a powerful early warning system for investors.