From Selection to Success: 5 Essential Checks for Choosing a Private Credit Fund
Private credit has quickly become a mainstay asset class, offering attractive yields and diversification to public fixed income. As more fund options come to market, the challenge for financial advisors isn’t whether to allocate to private credit, but how to evaluate the right fund for clients.
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Not all private credit strategies are created equal. Some funds lean more on traditional cash-flow lending, while others focus on asset-backed structures. Leverage levels can vary widely, as can loan size, concentration, and the true nature of the credit exposure itself. These differences can have a significant impact on both risk and return, making due diligence essential.
Here are five key checks financial advisors can use to evaluate private credit funds and build more resilient portfolios:
1. Confirm True Private Credit Exposure
Not every fund marketed as “credit” provides genuine private credit exposure. Some strategies have greater correlation to public markets, or depend heavily on structured products. With more than 60 credit interval funds available today, looking under the hood is critical to confirm that the underlying portfolio fits the role you intend in the overall allocation.
Our AFA QuickTake Is Your Private Credit Fund Truly Private? offers deeper insights into the various types of private credit and non-lending income investments that allocators should be aware of to make thoughtful portfolio decisions.
2. Evaluate the Role of Leverage
Leverage can enhance returns, but it can also magnify losses in stressed markets. Review how much leverage a fund employs, how it is structured, and whether it aligns with your clients’ broader risk tolerance and liquidity needs. The difference between controlled, moderate leverage and aggressive structures can be material.
Our AFA Perspective Hidden Leverage in Private Credit Funds: How to Assess What’s Hiding Under the Hood, discusses the risks and benefits of leverage along with the types of hidden leverage allocators should be aware of so that they can make informed decisions.
3. Diversify Loan Types: Cash-Flow vs. Asset-Based Lending
The type of lending a fund pursues meaningfully shapes its performance profile. Cash-flow lending relies on the company’s ability to cover interest payments from its operations, while asset-based lending (ABL) offers downside protection by securing loans with receivables, inventory, or equipment. Blending these approaches can provide both income and defense across market cycles.
Our AFA QuickTake Not All Private Credit Is Created Equal presents key differences between cash-flow lending and asset-based lending.
4. Manage Concentration Risk
Relying on a single fund or manager can leave portfolios overly concentrated in one strategy, borrower base, or sector. Diversifying across funds, managers, and loan types helps reduce idiosyncratic risk and build more balanced exposure. The goal is intentional diversification, not just adding another fund that looks like the first.
Our AFA Perspective Optimize Your Private Credit Exposure: A Framework for Diversifying Beyond Corporate Direct Lending offers a structured approach for evaluating complementary strategies.
5. Consider Loan Size Dynamics
Average loan size can have a material effect on portfolio behavior. Larger loans may bring stability but are sourced in a more competitive market and may be more tied to the broader economy. Smaller loans often offer higher yields thanks to the specialized needs of the borrowers, and tend to carry more idiosyncratic risk. Understanding this balance is an important part of fund selection.
Our AFA Perspective Optimize Your Private Credit Exposure: A Framework for Diversifying Beyond Corporate Direct Lending digs deeper into the impact of loan size in a credit portfolio.
Taking a Step Back Before Moving Forward
Private credit has earned a lasting role in many portfolios, but not all funds are created equal. By pausing to evaluate factors such as credit exposure, leverage, loan type, diversification, and loan size, advisors can move beyond headline yields to gain a clearer view of how a fund truly fits within client objectives.
Before adding new allocations, or simply rolling existing ones forward, conducting a thoughtful review can help ensure portfolios remain resilient, risks are managed deliberately, and opportunities are aligned with long-term goals
Disclosures
Alternative Fund Advisors, LLC (“AFA”) does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does AFA recommend that the information presented serve as the basis of any investment decision. Diversification does not assure a profit nor protect against loss in a declining market.
AFA is the investment adviser of the AFA Asset Based Lending Fund, a continuously offered closed-end interval fund. An investment in the Fund involves risk. The Fund’s investment in private credit securities is speculative and involves a high degree of risk, including the risk associated with leverage. Read the prospectus carefully before you invest. Investors should carefully consider the Fund’s investment objectives, risks, charges and expenses before investing. This information is contained in the Fund Prospectus and a copy may be obtained by calling 800-452-6804 or by clicking here.
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