Private Credit Funds: What They Are, How They Work, and How to Evaluate Them Like a Lender

What this article will teach you

• What private credit funds are (and what they are not)

• How private credit fund returns are actually generated

• The 3 risks that quietly blow up “safe yield” (liquidity, concentration, leverage)

• A lender-style due diligence checklist for choosing a fund manager

• When you may be better off lending directly instead of using a fund

You’re a high-income professional. You’ve done the “responsible” thing—maxed retirement accounts, bought some index funds, maybe owned real estate.

And yet you’re still asking the same question a lot of smart people eventually ask:

“Why does it feel like I’m taking all the risk… and someone else is getting all the control?”

That’s where private credit funds enter the conversation. They’re often pitched as a way to earn yield outside traditional bonds, without being at the mercy of public markets every minute of the day. But they’re also one of the easiest places to get seduced by marketing… and surprised by risk.

In the JBB world, we like credit because it’s the foundation of the whole game—“It’s credit that keeps everything moving. Other People’s Money.” But we also insist on discipline: structure, underwriting, and a credit policy—because in lending, the biggest mistakes come from weak “yeses” and slow “nos.”

What are private credit funds?

A private credit fund is a pooled investment vehicle that raises capital from investors and deploys it into loans that are not traded on public markets—think business-purpose real estate loans, bridge loans, asset-backed lending, direct lending to companies, specialty finance, and other forms of alternative lending.

In plain English: it’s a “credit bucket” solution—capital pooled together to make loans and collect interest (and fees). In the ACCESS framework, this is often contrasted with public-market fixed income (treasuries, munis, corporates). One example shared in the IPS module: moving the “fixed income bucket” toward private credit and alternative lending rather than traditional bonds.

Why investors like private credit funds

• Potential for income-focused returns (often paid monthly or quarterly)

• Less day-to-day price volatility than public bonds or stocks

• Access to deals you can’t easily source as an individual

• “Set it and forget it” convenience (compared to underwriting your own loans)

The catch: you’re investing indirectly

A key JBB distinction is direct vs indirect investing. Writing a check to a fund is “indirect”—you are trusting someone else to make decisions, manage risk, and execute the strategy.

That doesn’t make it bad. It just changes the game:

• Your upside depends on the manager’s skill and discipline

• Your downside depends on the manager’s underwriting standards and leverage choices

• Your control is mostly limited to choosing the manager (and reading documents you probably wish were shorter)

How private credit funds make money (the real sources of return)

Most private credit fund returns come from a few core drivers:

1) Interest income

The fund earns interest from borrowers. Sounds simple. It is—until you ask:

• Is the rate fixed or floating?

• What happens if defaults rise?

• What collateral protects principal?

2) Fees

Many credit strategies include fees at origination or at payoff. In direct private lending, lenders often earn points plus interest. A fund may capture similar economics—but how those fees are shared (and how much is consumed by management/performance fees) matters.

3) Financial engineering (read: leverage)

This is where yield gets “juiced.” And it’s where lender-minded people get cautious.

A fund manager can borrow against the portfolio or finance assets to amplify returns. But leverage is a blade that cuts both ways. As discussed in the fund manager transcript: more leverage means more risk, and it can “entirely destroy a deal” if something goes wrong.

The 3 risks you must understand before you chase yield

In the IPS framework, three words show up as recurring “portfolio killers”:

Liquidity

Can you get your money back when you want it? Many private credit funds have lockups, gates, or limited redemption windows. If life changes—or markets crack—“I can’t sell” is a painful sentence.

Concentration

Is the fund overly concentrated in one geography, one sponsor, one property type, or one borrower type? Concentration can hide under fancy branding.

Leverage

This one deserves repeating: leverage can make returns look smooth… right up until it doesn’t. The IPS module calls out leverage alongside liquidity and concentration as a key risk driver.

How to evaluate private credit funds like a private lender

JBB’s core principle: discipline wins—and discipline starts with a credit policy, not vibes.

Here’s a lender-style diligence list you can apply to private credit investing:

1) What is the fund’s credit policy?

Ask for the underwriting box:

• Target LTV (or equivalent collateral coverage)

• Borrower standards

• Hard stops and “no-go” categories

JBB teaches that a credit policy is your “private lending gospel”—your non-negotiables and guardrails.

If a fund can’t articulate its non-negotiables clearly, that’s not “flexibility.” That’s chaos.

2) What collateral backs the loans?

If the fund is asset-backed, understand:

• Seniority in the capital stack (first lien vs mezzanine)

• Real collateral vs “enterprise value” stories

• Who controls the workout process if things go sideways?

3) How does the manager think about leverage?

Don’t accept “We use leverage conservatively.” That’s marketing.

Ask:

• Maximum portfolio leverage allowed

• Fixed vs floating debt

• What happens if financing costs spike?

• Is leverage used to “financially engineer returns”? (That exact dynamic is called out as risky in the fund manager discussion.)

4) How are investors compensated for risk?

This is a killer question because it forces honesty:

• What yield is coming from real borrower payments?

• What yield is coming from leverage?

• What yield assumptions require perfect execution?

5) What’s the downside plan?

A lender always knows what happens if the borrower doesn’t pay.

Ask:

• Default rates and historical loss experience (net of recoveries)

• Workout team capability (in-house vs outsourced)

• Time-to-resolution assumptions

A belief rewire: “A fund is safer because it’s diversified”

Sometimes yes. Sometimes no.

Diversification doesn’t automatically reduce risk if:

• The fund is still concentrated in one cycle-sensitive niche

• The underwriting is loose

• Leverage is high

• Liquidity is constrained

Remember the principle shared in the fund manager transcript: if it sounds too good to be true, be very wary—especially when you’re investing indirectly and trusting someone else’s judgment.

Should you invest in private credit funds—or lend directly?

Here’s the simplest lens:

A private credit fund may fit if you want:

• Passive exposure to lending

• Broader diversification than you can build alone

• Professional sourcing and servicing

Direct private lending may fit if you want:

• More control over underwriting and collateral

• The ability to run a tight credit policy and say “no” fast

• A cleaner understanding of where returns come from

In JBB’s “6 Fs” of real estate, being the lender means you only do one job—FUND it—instead of doing everything an operator must do.

That’s the essence of “being the bank.”

Action steps: what to do next

1. Decide what role credit plays in your portfolio (income, stability, diversification).

2. Write down your “No List” (what you won’t invest in—structures, leverage levels, opaque strategies).

3. Demand a credit-policy explanation from any fund manager: underwriting box, leverage caps, collateral, and workout process.

4. If you want more control, start building your own lender skillset—the kind that lets you evaluate any credit opportunity (fund or direct) with confidence.