Private credit has become mainstream as companies face tight credit markets and regulatory uncertainty. While this growth creates opportunities for investment firms and their counsel, it also exposes gaps in due diligence practices that can lead to significant losses.
Recent high-profile cases illustrate the challenge. First Brands Auto, an equipment financing company, filed for bankruptcy after multiple lenders extended loans secured by physical assets without conducting thorough searches to identify existing liens. With multiple investors involved, unclear responsibility assignments meant no single party was actively monitoring the collateral or verifying lien positions. Each lender assumed another was handling due diligence. The collateral information existed in public records, but inadequate coordination and due diligence processes meant critical red flags went unnoticed until the borrower defaulted. Similar patterns emerged in other recent bankruptcies where off-the-books loans were made against warehouse inventory, exposing lenders to losses that proper UCC searches would have revealed.
The issue runs deeper than isolated mistakes. Private credit sits at the intersection of two different legal practices with distinct operational rhythms. Investment fund work emphasizes deal execution and fund lifecycle management. Traditional lending emphasizes ongoing compliance monitoring and secured transaction frameworks. These disciplines don't naturally overlap, and firms expanding into private credit are discovering that success requires infrastructure beyond deal expertise.
Ongoing compliance monitoring
The post-closing phase differs most significantly from traditional deal work. Unlike transactions that conclude at closing, lending requires continuous monitoring of multiple obligations across loan lifecycles that can extend for years.
When a lender files a UCC-1 financing statement to perfect a security interest, that filing expires after five years. Without a continuation statement, the lender drops from secured creditor to unsecured status, potentially losing millions in a bankruptcy. Traditional banks have dedicated departments monitoring these deadlines. Many private credit firms have no comparable systems.
Investment fund lawyers often disclaim responsibility for post-closing monitoring in their engagement letters, assuming funds will close before the five-year mark becomes relevant. In today's uncertain markets, loans frequently extend beyond typical fund lifecycles. Without monitoring systems, firms only discover expired filings when problems arise.
Establish calendar systems for tracking UCC-1 continuation filings, covenant compliance deadlines and financial reporting requirements. This requires either dedicated staff or outsourced services that can monitor multiple loans across different jurisdictions. The system needs to alert responsible parties well in advance of deadlines, not just track them. Many firms underestimate the administrative burden of managing dozens or hundreds of loans with different maturity dates, filing requirements and covenant structures.