Watch for three warning signs in private credit funds: rising non-accrual loans that aren't paying, increasing PIK interest that masks cash-flow problems, and NAV valuations based on internal marks rather than independent third-party assessments.
For someone evaluating private credit, are there other key things to watch for in a fund?
Yeah, for sure. Like I said earlier, one of the early indicators is increases of non-acruel positions, and non-acruel just means not paying, right? So, so tracking the health of payments coming into the fund. The other thing that private credit funds can do, which can be a little bit of, you know, sleight of hand, so you have to really dig into it more, is what's called payment in kind, right? PIK, or PIK. What, what happens is a fund can charge interest to a borrower, but if they're they don't have the ability to pay it in cash, they'll just accrue that to the balance of their loan, right? So instead of, you owe me $10,000 for last year interest, but you don't have $10,000 to pay me, you know, in cash. So I'm just going to add $10,000 to the million dollars that you owe me. And I'm gonna record that as income because from an accounting perspective, you can record that as income. So you want to look at how much of the portfolio is paid in cash and how much is paid in kind, payment in kind, PIK. And if that number starts to go up, that's another indicator. And then really understanding how NAV derived, probably a little too technical for this conversation, but understanding, you know, what are the methods that they are using? Do they have third-party corroboration of these numbers, or are they just marking these, you know, values themselves, right? Because there can be some conflicts of interest. And so you want to make sure that there's outside input to these values that are, that are being derived and are somewhat reasonable timeframe.
