What Should a Family Consider Before Investing in Private Credit?

Before investing in private credit, understand how the borrower will repay, what secures the loan, and what rights the family has if repayment falters. A stated interest rate does not describe the full risk. Credit investments can produce income, but capital may be lost if the borrower cannot pay or the protections prove inadequate.

Assess Repayment Capacity

Review the borrower's cash flow, existing debt, and planned use of the proceeds. Identify the source of repayment and test whether it depends on a future sale, refinancing, or business growth. Understand the borrower's ability to meet scheduled payments under less favorable conditions. If the loan relies on a project or operating company, examine risks specific to that activity and the people responsible for it.

Consider the loan's place in the capital structure. Debt is generally senior to equity, but the practical outcome depends on the documents, other claims, and available assets. Ask whether the loan is secured, what collateral supports it, and whether its value and condition can be established. The quality of loan collateral deserves its own review.

Read the Protections and Restrictions

Review the repayment schedule, interest terms, covenants, default provisions, and the lender's rights to enforce security. Identify what must happen before the borrower can take on more debt, sell assets, or change the business in ways that could affect repayment. A contract can provide protections, though practical recovery may still take time and involve costs.

Ask how the borrower will report on performance and what information the lender receives if results weaken. Confirm that collateral is properly documented and maintained. Understand any other lenders or claims with priority. Discuss the documents and enforcement provisions with your attorney. Tax treatment and entity structure can depend on the facts, so talk with your CPA as well.

Match Return and Liquidity

Compare the expected income with the possibility of delayed payments, restructuring, or loss of principal. Look at how long the capital may be tied up and whether the family can wait if repayment is delayed. Private credit can be hard to exit before the loan matures, so include it in the family's liquidity plan. Consider using a capital call and liquidity planner to map commitments against available cash.

Review the sponsor's or lender's experience and operating capacity. Determine who monitors the borrower, follows up on missed milestones, and manages a workout if the loan weakens. If a fund or intermediary is involved, examine its fee arrangements and any conflicts. Ask what reporting the lender provides. The protections in the credit agreement and the borrower risk review are central to the decision.

Private credit deserves the same discipline as any direct investment. Understand the repayment source, the enforceable protections, and the consequences if the expected outcome does not occur.

There is certainly a high degree of risk in buying debt or lending capital, but an experienced team can earn consistent profits simply from the SFO's cash.

Sources: The Family Office Book, The Single Family Office. Informational only, not financial, legal or tax advice.