Sponsors well-versed in operating PE funds are accustomed to certain risk/return profiles when evaluating investment opportunities and negotiating fees with prospective investors. That background can make it jarring when they seek to enter the world of private credit, where comparatively liquid assets with flatter projected returns create a very different negotiation dynamic with investors. In addition, distribution waterfalls and the treatment of proceeds are also affected in ways that are important to consider when forming a private credit fund. This second article in a two-part series highlights differences in how management fees and carried interest for private credit funds are structured compared to PE, while also describing the enhanced importance of recycling provisions in negotiations with LPs. The first article
examined how the liquidity of most private credit assets manifests in abbreviated fund lifecycles and new issues when admitting subsequent investors to the fund, as well as why subscription facilities play a more critical role for managing private credit funds than PE funds. See our two-part series: “What Must a PE Sponsor Consider Before Launching a Private Credit Strategy?
” (Feb. 4, 2020); and “Four Common Fund Structures to Mitigate ECI Risks When a PE Sponsor Launches a Private Credit Strategy
” (Feb. 11, 2020).