Evaluating Direct Lending Managers Framework

This document is a guide that outlines a framework for allocators to evaluate direct lending managers in the context of changing credit market conditions. It begins by discussing the favorable conditions for private credit funds from 2010 to 2024 and the potential risks that may arise as the credit cycle shifts. The author identifies seven key evaluation criteria that allocators should consider when assessing managers: differentiated sourcing, strong underwriting discipline, appreciation of credit documentation, portfolio diversification and correlation risk, active monitoring and risk management, independent workout capabilities, and the ability to lend during downturns. The guide emphasizes the importance of due diligence questions that can help distinguish between managers who rely on favorable market conditions and those with robust investment processes. Additionally, it highlights the need for allocators to be discerning in a more challenging environment, where differences in underwriting quality and risk management will become evident.