Private credit and PE funds: a due diligence checklist for regular investors

Private equity and private credit used to be institutional territory. Now interval funds, non-traded BDCs and REITs, and 'accredited investor opportunities' are pushed at ordinary affluent investors through advisors and slick platforms — and retirement plans are opening the door too. Some of these funds are legitimate; plenty exist mainly to harvest fees from people who can't evaluate them. The good news: a disciplined checklist filters out most of the trouble, because the trouble advertises itself in the documents.

First principles: what you're actually buying

Private credit funds make loans (usually floating-rate, to midsize private companies) and pass through the interest. Private equity funds buy companies with leverage, aiming to sell them for more years later. In both cases you're being paid for two things: illiquidity (your money is locked up) and complexity (you can't see daily prices). The core due-diligence question is whether the EXTRA return, after fees, actually compensates you for what you're giving up — and whether this specific manager can deliver it.

The fee stack: where returns quietly die

• Management fee: 1.25–2% annually — often charged on committed or gross (leveraged) assets, not just your invested capital. Ask which.
• Incentive fee / carry: typically 10–20% of profits above a hurdle. Check the hurdle rate and whether there's a high-water mark or clawback.
• The retail markup: non-traded products routinely add upfront selling commissions and distribution fees of 3–7% — paid to the person recommending them. Institutional share classes of similar strategies charge none of this.
• Fund-of-funds or 'access platform' wrappers stack a second fee layer (often 0.5–1%+) on top of everything.
• All-in, a retail alternative can consume 3–5% annually before you earn a dollar — meaning the manager must beat public markets by that much just to tie an index fund.

The due diligence checklist

1. Liquidity, precisely: When can you exit, and who decides? Interval funds typically offer quarterly redemptions capped at ~5% of fund assets — which means in stress, everyone queues and you may wait years. Non-traded REITs demonstrated exactly this by gating redemptions in 2022–23. Assume the money is gone for 7–10 years and see if the plan still works.
2. Every fee, in writing: management fee (on what base?), incentive fee and hurdle, upfront loads, servicing/distribution fees, expense ratios of any wrapper. Total them into one annual percentage.
3. The distribution's source: is the yield fully covered by earnings, or partly return of capital? The fund's own filings disclose this. Distributions funded by new investor money or borrowings are a flashing red light.
4. Track record that survives scrutiny: audited net-of-fee returns across a full cycle (including 2008 or at least 2020/2022), for THIS strategy and team — not the flagship institutional fund the retail product borrows its brand from.
5. Leverage: how much does the fund borrow, at what cost, with what covenants? Leverage turns a 5% asset problem into a 15% investor problem.
6. Valuation: who marks the assets, how often, and with what independent review?
7. Alignment: how much of the managers' own money is invested alongside yours?
8. Taxes and paperwork: K-1s (often arriving late enough to force filing extensions, and toxic inside IRAs via UBTI) vs. 1099s; ordinary-income treatment of credit interest makes these poor taxable-account holdings.
9. The counterfactual: what's the closest public-market equivalent (BDC ETF, high-yield index, small-cap value fund), and what does the private fund offer over it after ALL fees?

Sensible sizing, if you proceed

• Cap illiquid alternatives at 5–15% of investable assets, funded only from money with no plausible 10-year claim on it.
• Prefer institutional share classes via a fee-only advisor, or lower-cost registered vehicles, over commissioned non-traded products — the same exposure frequently exists at a third of the cost.
• Diversify across vintage years rather than committing everything at one point in the cycle.
• Hold income-heavy private credit in tax-advantaged accounts where its ordinary-income interest isn't taxed annually (watching UBTI rules).
• Write down, before investing, the specific after-fee premium you expect over the public equivalent — and review it annually against reality.

Print the checklist and require written answers before wiring anything — the discipline of writing is itself a filter, because the products that can't survive documentation tend to evaporate when you ask for it.

The bottom line

Private markets contain real skill and real diversification — mostly captured by institutions paying institutional fees with institutional access. What reaches retail is often the same asset class minus 3–5% a year in friction, plus a lockup. The checklist is your filter: total the true fees, trace the distribution's source, price the illiquidity honestly, and always compare against the boring public equivalent. If a fund survives all that, size it modestly. Most won't survive it — which is the checklist working.