Private Credit
Fund audits, loan valuation, borrower diligence, and tax support for direct lending funds and other private credit managers.
Overview
Private credit managers originate and hold loans to middle-market companies, often financing private equity acquisitions or providing capital that banks will not. Their funds report loans at fair value, earn complex fee and interest income, and answer to investors who want transparency into credit quality. Pease Bell, a Top 200 U.S. CPA firm headquartered in Cleveland, Ohio, supports direct lending funds and other private credit vehicles with fund audits, loan valuation support, borrower diligence, and tax compliance.
Our work spans the full life of a loan. Before funding, quality of earnings on the borrower tests the EBITDA that sizes the loan. During the hold period, we review how loans are valued and how interest, payment-in-kind income, and fees are recognized. At the fund level, we audit the financial statements and prepare partnership tax filings and investor K-1s. Audit, tax, and advisory sit under one roof.
How We Help Private Credit Funds
Private Credit Fund Audits
Audits of direct lending and private credit funds under U.S. GAAS, focused on loan existence and fair value, interest and fee income recognition, non-accrual policies, and investor disclosures.
Loan Valuation Support
Review of fair value methods for private loans under ASC 820, including yield analysis, credit spread calibration, and the effect of borrower performance on Level 3 measurements.
Borrower Quality of Earnings
Quality of earnings on prospective borrowers, testing adjusted EBITDA, working capital, and debt-like items so the credit team can size the loan and set covenants on validated figures.
Income Recognition Review
Review of how the fund accounts for original issue discount, payment-in-kind interest, amendment and prepayment fees, and loan modifications, so income is recorded consistently and supported.
Investor Reporting
Capital account statements, portfolio summaries, and credit metrics such as non-accrual and watch-list exposure, reconciled to the fund’s books and presented clearly for limited partners.
Fund Tax Compliance
Partnership returns, investor K-1s, and planning around the character of interest and fee income, including considerations for tax-exempt and non-U.S. investors, coordinated with fund counsel.
Challenges We Help You Address
- ✓Supporting fair value marks on loans without observable trading prices
- ✓Recognizing PIK interest, OID, and fees consistently across the portfolio
- ✓Validating borrower EBITDA before sizing loans and setting covenants
- ✓Giving investors clear visibility into credit quality and non-accruals
- ✓Addressing tax concerns of tax-exempt and non-U.S. investors in lending funds
Frequently Asked Questions
How are private credit loans valued?
Private credit funds that follow investment company accounting measure loans at fair value under ASC 820. Because most private loans do not trade, managers commonly use a yield or discounted cash flow approach that compares the loan’s terms to current market yields for similar credit risk, adjusting for borrower performance. Many funds also use independent valuation firms. Auditors test the inputs, methods, and governance behind these Level 3 measurements.
What is a business development company?
A business development company, or BDC, is a closed-end investment vehicle that elects to be regulated under the Investment Company Act of 1940 and invests primarily in private or thinly traded U.S. companies, often through loans. Many BDCs elect to be taxed as regulated investment companies, which carries distribution and diversification requirements. BDCs can be publicly traded or privately offered.
Why do private credit lenders order quality of earnings on borrowers?
Private credit loans are usually sized as a multiple of the borrower’s EBITDA, and covenants are often built on adjusted EBITDA definitions. A quality of earnings report tests those adjustments, reviews working capital, and identifies debt-like items. It helps the lender decide how much to lend and set covenants that reflect the borrower’s actual cash flow rather than an optimistic presentation.
What is PIK interest and how is it accounted for?
Payment-in-kind, or PIK, interest is interest that is added to the loan balance instead of being paid in cash. Funds generally accrue PIK interest as income when it is expected to be collected, which means managers need to assess collectibility as part of their accounting. PIK income can also have tax and distribution consequences, so its treatment should be reviewed consistently.
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