Private credit due diligence for direct lenders

A sponsor presents a business with resilient demand, recurring revenue, and a clear growth plan. For a direct lender, the central question is how that business would perform if the plan came under pressure and what that would mean for its ability to repay.

Private credit due diligence requires an independent assessment of the borrower alongside financial analysis, documentation, and the proposed lending terms. In private markets, limited public information can make the commercial part of that assessment particularly demanding.

This guide focuses on borrower-level commercial research for direct lenders. It explains how to test sponsor assumptions and where Third Bridge's expert insights can help. Selecting a private-credit fund or assessing a manager requires a separate diligence framew

Start with repayment and the commercial downside

A lending case needs to explain how the borrower generates cash and what could interrupt that process. The research questions should follow the business's actual sources of demand and operating constraints.

For example, recurring revenue may depend on continued customer activity, contract renewal or repeated purchasing decisions. Each mechanism has a different vulnerability. Understanding that distinction helps the credit team assess which downside assumptions deserve closer attention.

Private loans may offer limited opportunities to exit a position quickly. This makes upfront company and industry understanding particularly valuable in direct lending. Prioritize the commercial assumptions that underpin repayment before the deal closes.

Convert the sponsor narrative into an evidence plan

Begin with the sponsor and management materials, then separate their statements into claims that can be investigated. Record the supporting company data, the independent evidence needed and the potential effect on the credit case.

Use this plan to decide where industry perspectives can add context and where documentary verification is required. Expert insights research can help explain customer behaviour; it cannot verify the borrower's reported cash balance or the enforceability of loan documents.

Build an independent understanding of the business

Begin with private company research to establish how the business and its market work before pursuing individual claims. Identify the borrower’s customer groups, the alternatives they consider, and the conditions that drive purchasing.

Third Bridge's Library provides company and sector interviews that can help credit teams develop this context. Relevant coverage can make a subsequent expert brief more precise by revealing which aspects of the business need further investigation.

The target's exact operating model matters. A business described as a service provider may combine subscription access, project work and usage-based revenue. A broad sector view needs to be reconciled with the borrower's actual exposure.

Avoid treating a market's resilience as evidence that every company in it is equally resilient. Customer mix, service scope, and competitive position can produce materially different outcomes.

Investigate customer dependence and purchasing behaviour

Ask why customers buy, who controls the budget and what could cause spending to change. The aim is to understand the conditions behind a revenue assumption.

For a customer-concentrated borrower, investigate the nature of the relationships as well as their size. A long relationship may reflect strong service, a lack of alternatives, or a purchasing arrangement that is about to change. The implications differ.

Channel checks with relevant customers and industry participants can help a credit team understand switching considerations, procurement cycles and the circumstances in which work is delayed. Keep the questions within each expert's permitted knowledge and experience.

Third Bridge's expert calls support targeted sourcing for a defined research brief. For direct lenders, that brief can focus on the particular customer behaviour or operating issue that remains uncertain.

An illustrative test of a recurring revenue claim

Consider a hypothetical lender assessing a maintenance business whose sponsor describes revenue as recurring. The company serves customers across several end markets, and the credit case assumes demand remains stable through a slowdown.

The team first establishes what recurring means in this business. Some work may be scheduled, some tied to equipment use, and some triggered by failures. Those categories could respond differently to lower customer activity.

A targeted research programme could seek perspectives from maintenance procurement professionals and experienced operators. Through Third Bridge, the lender can request relevant profiles and explore which work customers can defer, how supplier reviews occur and where service requirements vary by end market.

The team then compares that context with the borrower's contracts, customer mix, and financial information. If a meaningful part of activity depends on equipment usage, the downside analysis needs to consider what happens when usage falls.

This illustrative workflow shows how expert research can sharpen a credit question. It does not establish a particular borrower's revenue resilience or replace verification of its actual agreements.

Examine how operating pressures reach cash flow

Commercial research should help explain the path from market development to financial effect. A change in customer demand may influence volumes, staffing requirements, inventory, or the time taken to collect payment.

Work with the financial diligence team to identify which mechanisms matter for the borrower. Then use relevant industry perspectives to investigate the operating conditions behind them.

• If growth requires more staff, how difficult is recruitment and how long does training take?
• If the business holds inventory, what affects replenishment and the risk of obsolete stock?
• If pricing needs to increase, what affects customer acceptance and timing?
• If demand weakens, which costs can adjust and which remain committed?

These questions support scenario construction. They do not supply a complete financial forecast. Reconcile the research with company-specific data and keep uncertainty visible in the model.

Keep the expert brief narrow enough to be useful

A request to understand an industry may suit initial orientation. Later in underwriting, expert calls should test the gaps in desk research, with the brief identifying the specific issue, relevant customer segment, geography, and period.

Seek experience that matches the question. A senior industry executive may explain historical market structure, while an operator may better understand a particular delivery constraint. Where accounts conflict, investigate differences in exposure before deciding how much weight to give them.

Capture the expert's relevant experience dates and distinguish direct observations from estimates. All conversations should follow applicable research and compliance requirements, including restrictions on confidential information and material non-public information.

Our guide to primary research for investors and consultants explains how interviews and other methods contribute to evidence gathering.

Carry unresolved questions into the credit memorandum

The memorandum should show which commercial assumptions have independent support, which rely mainly on company information, and which remain uncertain. Link each material finding to the relevant financial scenario or further diligence action.

Maintain a distinction between the borrower's operating outlook and other parts of the lending decision. Legal protections, security, valuation, and transaction terms require their own analysis. Third Bridge provides research inputs to the team's assessment rather than a credit recommendation.

For an investment that proceeds, turn the important assumptions into monitoring questions. Although pre-deal research is central to direct lending, the operating conditions behind the case still need to be revisited over the life of the loan.

Test the business behind the borrowing case

Third Bridge supports credit investors with access to company intelligence and relevant industry expertise. Direct lenders can use those inputs to investigate the commercial conditions behind sponsor materials and focus attention on unresolved downside questions.

Have a borrower or sector under review? Request a trial to discuss the expert perspectives and existing coverage relevant to your diligence.

Frequently asked questions

How does private credit diligence differ from private equity diligence?

Both examine the company and its market. A direct lender places particular emphasis on repayment capacity and downside exposure, while an equity investor also assesses how growth and other value-creation assumptions affect the investment outcome.

Can expert research replace financial or legal diligence?

No. Expert research provides commercial and operating context. Financial information, legal documentation, security, and other transaction-specific matters need the appropriate specialist wor

Should private credit investors use transcripts or live calls?

Existing transcripts can establish company and sector context. Live calls are useful when a material question requires a more specific perspective. The choice depends on the question and the relevance and freshness of available coverage.