Painful rules I've learned over my career

• Credit is a terrible way to get rich and a great way to stay rich. Most people figure this out backwards. If you want to get rich go trade equities. If you want to sleep, stay here.

• For most loans most of the time, your edge is structure. Spread is what they pay you to look smart. Covenants are what keep you alive when you're not.

• A good credit needs nothing to go right to deliver the contractual return. The more things that need to go right, the more it's equity dressed up in debt clothing.

• When you look at a credit ask two questions. If this borrower stops paying on Tuesday what do I actually own and what can I actually do. And why is this borrower taking my money instead of someone else's. If the answer to the second is "because no one else would lend," that's information. Price it.

• There is no such thing as bad credit. Only bad price and bad structure. Going-in spread net of fees and expected losses is one of the best predictors of future performance. Everything else is narrative. Narrative doesn't pay coupons.

• Adjusted EBITDA is a marketing document. Build your own model and assume one third of the addbacks are fiction. The other two thirds are optimistic.

• Every CIM has a page that explains why this time the borrower's market is about to inflect. It never inflects. The hockey stick is the most dangerous shape in finance.

• Assume today's spread is tomorrow's spread, and the spread you're being shown is the tightest it'll be for the life of the loan. Underwrite to the spread you'd need in a bad year, not a good one. Nobody ever got fired for being too conservative. They got fired for the deal they approved at drinks.

• Cap structures aren't linear, they're dominoes. The covenant breach you're worried about is rarely the one that kills you. It's the cross-default to the revolver, the change-of-control trigger, or the maturity wall on the second lien nobody modeled because "that's so far out." Map the entire stack before you fund. Then map it again drunk to see what you missed sober.

• Covenants you don't test are covenants you don't have. If you've never had to enforce one, you don't actually know if your docs work.

• The borrower's lawyer is better than yours. Assume this until proven otherwise. They've seen your form docs before and know exactly which provisions to push on.

• Read the documents, not the vibes. Counterparties will exploit any ambiguity they can find. The arranger's job is to get the deal done, not to protect you.

• Structure matters more than a cool logo. Be wary of cross-collateralization. I've seen one bad deal turn into a fund-level problem because of a structuring choice. Same borrower, different structure, completely different investment.

• The sponsor is done making money before you're done getting paid back. Always. Their fees are front-loaded, your principal is back-loaded. The promote was earned the day they closed the fund. Your money comes back when God and the borrower feel like it.

• Sponsors with real skin in the game and a franchise to protect are good and rare. First-time GPs running someone else's playbook will ruin your portfolio and then raise Fund II.

• Family offices who actually know the business are excellent. Family offices who think they know the business are terrifying.

• Don't get too happy when the closing happens. I have never met a borrower who actually wanted to prove their business plan works. They wanted your money. Enjoy the champagne language about the exciting partnership. Then remember that humility is free and default rates are not.

• The deal you're most excited about is statistically the one most likely to blow up. Excitement means you've fallen in love with the story. Stories don't repay principal.

• If you are explaining to your IC why this deal is an exception to your own credit policy, it's not an exception. It's a bad deal you want to do anyway. At least be honest about it.

• Your investment committee is more important than the best deal anyone has ever seen. The point of the IC is to kill bad ideas. If it's become a rubber stamp for what origination sends over you don't have a committee. You have a notary.

• The best deals I've ever done were ones where the seller needed to sell more than I needed to buy. The worst were ones where I needed to deploy more than the borrower needed to borrow.

• 99% of LPs say they want downside protection. 10% will price it. They reward yield until the cycle turns, then they reward survivors.

• Leverage is not a substitute for spread. Leverage on top of weak credit is just a confession with an IRR attached. If your fund-level returns only work with multiple turns of repo you are one margin call away from a very awkward LPAC conversation that starts with "so as you may have read in the press."

• Cheap warehouse financing is dangerous the way free drinks at a casino are dangerous. Easy financing tempts you into originating loans you would never hold unlevered. The warehouse disappears. The loan stays. You stay.

• You are not in partnership with your warehouse lender. They are a counterparty with a credit committee, a margin desk, and no sentimental attachment to your business plan.

• Match your funding to your assets. Fixed-rate funding against floating-rate assets can be a gift. The reverse is a slow-motion disaster you'll explain on quarterly calls for years.

• A plan that gets you 10% net by buying sponsor-backed unitranche at SOFR+475 with 50% leverage only works in one rate environment. It's probably already gone.

• A lot of "private credit" returns over the last decade were really just the rates trade wearing a fake mustache.

• Charging management fees on undeployed capital is a patience tax. If the money isn't at risk don't pretend it is. Your LPs can do basic math. Some of them even enjoy it.

• Everyone loves a PIK toggle until it's time to get paid. PIK is an IOU stapled to a prayer. If the borrower pays at maturity, great. If they restructure, that IOU turns into equity you never wanted in a company you now partially own and fully resent.

• Workouts take longer and cost more than you think. Then double it. Restructurings are not a line item, they are a parallel business with their own staffing, legal bill, and emotional toll. I have never seen a workout come in under budget. I have seen several come in under marriages.

• The first restructuring is usually the cheapest. Take the pain early. I've watched lenders spend eighteen months doing amend-and-extends that next year's workout committee will find hilarious.

• Credit is an operating business. You need workout people, restructuring lawyers, and people who have actually run companies. Spreadsheets do not collect defaulted loans. A beautiful model and an empty recovery account will teach you this exactly once.

• Hire before the fire. The deal that goes sideways will not wait for your next hiring cycle, your next budget review, or your next offsite where you planned to "discuss resourcing."

• Hire the right profile for your strategy. Sponsor finance needs relationship people. Special situations need workout muscle and forensic accounting. Hiring the wrong profile is how good funds become average funds with nice offices.

• Your back office is your early warning system. When the servicer flags something weird about a payment, that's not an operational nuisance. That's the first sign. Every default I've lived through had a boring operational signal six months before the dramatic one.

• Due diligence is not a phase. It's a state of mind that continues after funding. The moment you stop paying attention to a performing loan is usually about six months before it stops performing.

• Treat the capital introduction memo as what it is: a sales document in a Patagonia vest. Underwrite your own numbers. Give detailed feedback even if you pass. This market is small enough that people remember who was thoughtful. They also remember who ghosted.

• Distressed has bimodal outcomes. Par or pain. The recovery range in the committee memo exists to make everyone feel better about a decision that's already been made.

• Caught at the bottom? Good luck. Missing the first 10% on a security going from 35 to 60 cents will almost always cost you less than patiently averaging down from 40 to zero and back up to 60. Don't be a hero on the way down.

• Chasing spread by reaching down the stack does not work. Spread compression is not solved by buying worse credit. The answer is never "same thing but more levered."

• Don't try to beat Ares or Apollo on cost of capital. You will lose. Compete on speed, structuring creativity, and willingness to do the work their committees won't approve fast enough.

• Institutions are constrained, not omniscient. Deployment pressure leads to strange-looking deals. Sometimes those are exactly the deals you want to be on the other side of.

• "Underserved" usually means "hard for a reason." Some segments have been underserved since before you were born and they'll be underserved after you give up. Understand why before deciding you're the hero.

• If someone tells you their fund has never had a loss, they either haven't been around long enough, they're marking the book generously, or they're lying. Pick two.

• Never confuse a low default rate with good underwriting. Sometimes you just got lucky with the cycle. The difference between skill and timing only becomes clear when the tide goes out.

• Credit cycles don't send calendar invites. A decade of nothing going wrong does not mean the next eighteen months can't get ugly fast.

• You earn the returns you deserve, not the returns on your marketing decks. Not because of the font you used in the pitchbook.

• In workouts, reality wins. You want it to be one way. But it's the other way.