How to Read a Private Credit Fund Prospectus: 8 Sections That Reveal Real Risk

For a direct lending fund with 80 to 120 borrowers, a top-10 concentration above 30% warrants scrutiny. Above 40%, you are carrying single-name risk that is inconsistent with what is being sold as a diversified credit vehicle.

Funds like Golub Capital BDC and Antares Private Credit Fund publish this data in their regular filings and quarterly reports. Non-traded funds in their offering period sometimes report only partial portfolio information. In that case, look for the concentration policy stated in the investment guidelines section: "No single borrower will exceed X% of total assets." If that number is 5% or higher, you may end up with a 25-position portfolio that has more in common with a concentrated credit fund than a diversified one.

Sector concentration matters too. A fund with 40% of its loans in software and 20% in healthcare is making sector bets. If spreads in a single sector widen simultaneously, the NAV impact runs across a large portion of the book at once, not just through individual borrower defaults.

Sections 5 Through 8: The Structural Risks Investors Miss

Section 5: Covenant-Lite Exposure

The term "covenant-lite" refers to loans that lack traditional financial maintenance covenants, the ongoing ratio tests that allow lenders to intervene before a borrower reaches full default. In a standard leveraged loan with maintenance covenants, a lender can declare a technical default when the borrower's leverage ratio exceeds a threshold, giving the lender leverage to restructure or exit the position before losses compound.

Covenant-lite loans eliminate that early warning system. Borrowers can deteriorate before a lender has any contractual right to act, a dynamic that proved costly in the 2022 to 2024 credit cycle when higher-for-longer rates stressed middle market borrowers.

The prospectus will typically disclose covenant-lite risk in a section titled "Covenant-Lite Loans" or "Risks Associated with Loan Documentation." Fund supplements and quarterly reports sometimes break out the actual percentage of the portfolio that is covenant-lite. Funds from Blue Owl Capital and Crescent Capital BDC publish portfolio composition data that includes covenant information. Ask the fund manager for the current percentage before subscribing. If they cannot provide it, that is informative on its own.

No universally accepted threshold exists for what is "too much" covenant-lite exposure in a private credit portfolio. A reasonable starting question is: does the fund disclose its covenant-lite percentage, and has that percentage been rising over the past four quarters?

Section 6: Redemption Restrictions

Find the section titled "Liquidity," "Redemptions," or "Transferability of Shares." Read it slowly. Private credit funds are illiquid by design, but the specific mechanics of that illiquidity vary enormously and determine what happens to your capital if you need it back before the fund matures.

Three terms define the structure. The lockup period is the time during which no redemptions are permitted at all, often 12 to 24 months for non-traded BDCs and longer for closed-end drawdown funds. Gates are percentage caps on total redemptions in any period, typically 5% of NAV per quarter for semi-liquid structures. A gate means your redemption request may be queued across multiple periods if other investors redeem simultaneously. A fund permitting 5% quarterly redemptions with a gate would take five years to redeem all capital in a stress scenario. That is not hypothetical: it happened to several non-traded REIT structures in 2022 and 2023.

The prospectus must also disclose the board's ability to suspend redemptions entirely. Know the trigger conditions and the maximum suspension duration before you invest.

Section 7: GP Catch-Up Structure

The carried interest section describes how the fund splits profits between the general partner and limited partners. The preferred return (also called the hurdle rate) is the annual return LPs must receive before the GP participates in profits. Per the Mayer Brown 2025 BDC study, hurdle rates in BDC structures range from 6.00% to 8.00%.

After the hurdle is cleared, most structures include a GP catch-up: a period during which the GP receives 100% of incremental returns until it has collected its full carried interest on all profits, not just those above the hurdle. Mayer Brown's data shows catch-up rates ranging from 6.75% to 10.668%.

The practical effect: in a fund with an 8% hurdle, 20% carried interest, and a full catch-up, the GP catches up on the full 12% return, not just the 4% above the hurdle. That shifts a meaningful portion of the year's gains from LPs to the GP before LPs see any additional upside. If the fund carries 20% carry with a full catch-up while the Callan 2023 benchmark sits at 15% median carried interest, you are on the expensive side of the market without necessarily being on the better-performing side of it.

Section 8: Auditor Independence and Related-Party Transactions

This section is the least glamorous and among the most telling. Find the auditor disclosure, usually in the first 30 pages or in the financial statements at the back of the document. Note the auditor's name and how long they have audited the fund. Then find the related-party transactions section.

Related-party transactions are business dealings between the fund and entities affiliated with the GP: loans to affiliated portfolio companies, fee-sharing with affiliated service providers, asset purchases from or sales to affiliated funds. Every private credit fund has some. The question is their size, frequency, and whether they occur at arms-length terms.

Two things to check. First: does the fund pay administrative fees to affiliates of the GP? The Cliffwater study's 0.48% average administrative cost often flows to affiliated service entities, adding to GP economics beyond the stated management fee and carry. Second: has the auditor issued any qualified opinions or identified material weaknesses in internal controls? That information is in the audit report itself. A clean opinion from a recognizable firm, combined with a related-party section consistently sized across multiple periods, is a positive sign. A new auditor following restatements, or a rapidly growing related-party section with no explanation, warrants direct questions before you sign.

The 30-Minute Prospectus Checklist

Use these eight checks. Allocate roughly four minutes per section.

• Fee base: Gross assets or net assets? Calculate the NAV-equivalent fee. Flag anything above 1.50% NAV-equivalent for explanation.
• PIK disclosure: Is the current PIK percentage disclosed? Is it above 15% of total income? Ask what the PIK limit is and whether any positions are on modified PIK arrangements.
• Leverage: Current debt-to-NAV ratio? Maximum permitted? What are the coverage ratio test triggers in the credit facility?
• Concentration: Top 10 borrowers as a percentage of portfolio? Stated single-borrower limit? Any single industry above 25%?
• Covenant-lite: Does the prospectus or recent supplement disclose a covenant-lite percentage? Has it changed materially over recent quarters?
• Redemption mechanics: Lockup period? Quarterly redemption cap as a percentage of NAV? Conditions under which the board can suspend redemptions entirely?
• GP catch-up: Hurdle rate? Catch-up rate, and is it full or partial? Does carried interest apply to all profits or only profits above the hurdle?
• Auditor and related parties: Auditor name and tenure? Related-party fees paid to GP affiliates? Any qualified opinions or material weakness disclosures?

None of these checks is a disqualifier on its own. A GAV-charging fund with a well-disclosed fee structure and a track record above its hurdle may be worth the higher fee. A fund with 18% PIK income may be compensated for that risk through wider spreads. The checklist creates a baseline for comparison and surfaces the questions a pitch deck will never raise.

The Cambridge Associates 2024 private credit report found that manager selection accounts for a significant portion of return dispersion in private credit, far more than in public fixed income. Managers who produce top-quartile returns generally have nothing to hide in the fee table, the leverage schedule, or the related-party section. The prospectus, read carefully, tells you which category you are dealing with.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.