How a private credit investment committee actually works

What the committee is for

A private credit fund lends its investors' money and usually holds each loan until it is repaid. The investment committee is the group of senior people who decide whether a loan is made, on what terms, and how much the fund will hold. It exists so that no single deal team can commit the fund's capital on its own judgment.

Committees differ by firm in size, membership and formality, but the job is the same everywhere: test the deal team's case before the money goes out, because once a private loan is made there is usually no market to sell it into if the view turns out to be wrong.

Before the committee

Most deals meet the committee more than once. An early screen, often a short paper or a conversation, decides whether the opportunity is worth the cost of full diligence: does it fit the fund's strategy, is the borrower the right size, is the proposed leverage in a sensible range? Deals that pass are diligenced in depth: the financial model, management meetings, quality-of-earnings work, industry calls and the draft term sheet.

The final committee then sees a full memo. By that stage the deal team should already know the committee's likely concerns, because the best analysts write the memo to answer them.

The memo

Formats vary, but a strong credit memo moves in an order that lets a busy reader decide quickly and then check the reasoning:

1. Recommendation. Approve, approve with conditions, or decline, with the size and type of loan and the two or three reasons that decide it.
2. Business and key risks. What the company does, why it generates cash, and the few risks that actually drive the outcome, ranked rather than listed.
3. Financial analysis. Leverage, interest coverage, free cash flow and liquidity, with the inputs shown so the committee can check them.
4. Downside case. A specific, plausible stress carried all the way through to leverage, coverage, liquidity and covenant headroom.
5. Structure and terms. Whether the covenants, security and other terms protect the lender in that downside.
6. Conditions. Anything that must be true or must change before closing.

In the room

Committee questions tend to cluster. What has to go right for this loan to be repaid, and how confident are we? What does the downside look like, and is it severe enough? Where is the cushion: how far can earnings fall before a covenant trips, and how much liquidity is left at that point? Who else is in the capital structure, and what happens to our recovery if the company is sold or restructured?

Members also test the memo's own numbers. An analyst who can say where each figure comes from, and what it would take for it to be wrong, earns credibility that a polished slide cannot.

“The committee isn't grading the deal you hope for. It's testing the downside you've underwritten.”

The four outcomes

Conditions are concrete: lower leverage at close, a tighter financial covenant, a cap on EBITDA add-backs, more equity from the sponsor, a minimum liquidity test, or more frequent reporting. Vague conditions are a sign the committee didn't get the answers it needed.

After a yes

Approval sets the limits. Lawyers then turn the term sheet into a credit agreement, and the deal team negotiates inside the approved terms. A material change, such as a larger loan, looser covenants or a different structure, goes back to the committee. Once the loan closes, the same discipline continues as monitoring: regular reporting, covenant tests and periodic portfolio reviews in which the committee sees how its past decisions are performing.

For someone learning the job, the takeaway is simple: write every memo as if you will have to defend each number in the room, and practise answering the questions before anyone asks them.