Introduction
Private credit is a dynamic and growing sector, offering borrowers an alternative route to raising capital and investors a chance to access tailored opportunities outside traditional markets. However, as with all areas of private markets, transparency is the cornerstone of success. Yet, our experience in assessing over 100 opportunities has shown that the biggest hurdle for many borrowers and issuers lies in their lack of openness.
The Importance of Transparency
Transparency in private credit is not merely a best practice; it is essential for building trust between issuers and investors. Borrowers must recognise that private credit investors, unlike their public-market counterparts, often conduct detailed due diligence. They want to understand the underlying security, contractual arrangements, and the flow of funds before committing capital.
When borrowers fail to provide clear and comprehensive information, they risk alienating investors and reducing their chances of securing funding. Worse, the perception of opacity can cast a shadow over the issuer’s credibility, not just for the deal at hand but for future opportunities as well.
Lessons from Over 100 Risk Assessments
At Kingsbury & Partners, we have reviewed more than 100 private credit opportunities across various sectors and geographies. Time and again, the recurring issue has been the lack of transparency.
Common failings include:
- Unclear Underlying Security
Investors need to know what is backing the loan. Whether it is property, receivables, or other assets, the absence of clear documentation and valuation reports raises red flags. Security is often the bedrock of a private credit deal, and ambiguity in this area can be deal-breaking. - Opaque Contracts
Contracts form the legal framework of any private credit deal, yet we frequently encounter incomplete or poorly drafted agreements. Borrowers who fail to outline their obligations, repayment schedules, or enforcement mechanisms signal an alarming lack of preparedness. - Untracked Flow of Funds
Investors need visibility on how their money will be deployed and how repayments will be sourced. Borrowers who cannot provide a clear breakdown of fund allocation or a credible repayment strategy invite scrutiny and scepticism. - Inadequate Risk Mitigation
Borrowers often fail to address potential risks or present contingency plans. This omission leaves investors questioning how their capital is protected in adverse scenarios.
When “Easy Money” Becomes a Red Flag
One of the most common patterns we observe is ”mature” companies continuing to rely on certain forms of private credit as an “easy money” solution, despite the higher costs compared to other funding options. This raises critical questions about the financial maturity and strategic direction of the borrower.
Private credit serves a valuable purpose for companies in early growth stages, during periods of transition, or in niche situations where traditional financing is unavailable. However, when an established company with stable revenues and assets continues to use these more expensive forms of capital, it suggests potential issues, such as:
- Inability to Access Cheaper Capital
Companies that should qualify for lower-cost bank loans or public market debt but continue to rely on private credit may signal underlying creditworthiness issues or governance concerns. - Poor Financial Planning
Mature companies relying on costly private credit could indicate a lack of foresight in managing cash flow and capital requirements. - Overleveraging
Some borrowers use private credit to stack debt, obscuring their overall leverage and creating long-term risks for investors. - Short-Term Thinking
Relying on private credit indefinitely can reflect a short-term approach to funding, prioritising convenience over sustainability.
Investors are increasingly wary of these patterns. Borrowers must present a compelling rationale for their choice of funding, demonstrating how it fits within their broader financial strategy. Failing to address this creates doubts about their operational maturity and reliability.
How Borrowers Can Build Confidence
Borrowers aiming to succeed in the private credit market must prioritise transparency from the outset. Here are practical steps to achieve this:
- Provide Clear Documentation
Comprehensive, well-prepared documents that outline security, contracts, and fund flows are non-negotiable. Clarity and detail in these areas demonstrate professionalism and readiness. - Adopt Open Communication
Be proactive in addressing questions and concerns. Investors appreciate issuers who are candid about their challenges and solutions, as it builds trust and rapport. - Work with Experienced Advisers
Engaging experienced advisers, such as Kingsbury & Partners, can help borrowers structure their offerings in a way that appeals to investors while meeting rigorous transparency standards. - Think Like an Investor
Borrowers should view their offering through the lens of a cautious investor. Ask: “Would I lend money to this opportunity with the information provided?” If the answer is no, further work is needed.
Transparency as a Competitive Advantage
Borrowers who embrace transparency do more than secure capital; they set themselves apart in a competitive market. Investors value trust and openness, and companies that consistently demonstrate these qualities build reputations that facilitate future funding.
At Kingsbury & Partners, we believe that transparency is not just an obligation but an opportunity. Borrowers who provide clarity on their operations and structure empower investors to make informed decisions, creating a mutually beneficial relationship.
If you’re a borrower or issuer looking to raise capital in private credit, we can help. Contact us today to learn how we can structure your opportunity to meet investor expectations.
