4.3 The deal lifecycle

A private loan is not a single event. It is a process that can start months before any money moves and continue for years afterwards. Each stage involves different people and produces different documents, and each one is a point where a lender can protect itself or make a costly mistake.

Knowing the lifecycle helps whatever your role. Deal team members need to run it. Operations and fund accounting staff pick up the loan at closing and live with it until repayment. Investor relations and LP-side analysts are often asked how a manager sources and approves deals. This lesson walks through each stage in order. Timelines are illustrative and vary a lot from deal to deal.

The stages at a glance

In practice some stages overlap. A lender often issues a non-binding term sheet during diligence, for example, and legal drafting may start before final approval.

From origination to approval

Origination is how a lender finds deals. In sponsor-backed lending, the main source is relationships with private equity sponsors: the firms that buy companies and need debt to finance the purchase. Lenders also hear about deals from intermediaries such as investment banks and debt advisers, who run processes for borrowers, and from existing borrowers who need more money. A lender's origination strength, meaning how many good deals it sees, is one of the things investors assess most closely.

Screening is a quick filter. Lenders see far more deals than they can fund. In a first review, often a few days, the deal team checks basic fit: the size of the loan, the industry, the borrower's earnings and debt levels, the sponsor, and whether the likely pricing is attractive. Most deals are dropped here.

Due diligence is the detailed investigation. It usually covers:

• Financial diligence. Are the historical numbers right, and are the forecasts believable? Lenders rely heavily on a quality of earnings (QoE) report, prepared by accountants, which tests and adjusts the borrower's reported earnings (usually EBITDA). This matters because loan size and covenants are set as multiples of earnings.
• Commercial diligence. How strong is the business? Its market, competitors, customers and customer concentration. Often supported by consultants' reports and management meetings.
• Legal diligence. Company structure, existing debt, material contracts, litigation, and what collateral is available. Handled by legal counsel.

In sponsor deals, much of this work is commissioned by the sponsor and shared with lenders, who then add their own analysis.

The deal team summarizes its findings in a credit memo and presents it to the investment committee (IC), a group of senior investors who approve or reject the loan. The credit or risk team, where the manager has one separate from the deal team, often reviews the memo independently. Approval may come with conditions, such as a lower loan size or tighter covenants.

Documentation and closing

The main terms are set out in a term sheet: loan amount, pricing, maturity, amortization, covenants and security. It is usually non-binding, but it frames the negotiation.

Legal counsel for the lender and the borrower then draft the full credit agreement, the legal contract governing the loan, along with security documents that give lenders their claim on collateral. Negotiation focuses on details such as how EBITDA is defined and how much flexibility the borrower has. (PC301 covers documentation in depth.)

At closing, the parties sign the documents and the conditions to funding are checked off. On funding, the money moves to the borrower. Where there are several lenders, an administrative agent handles payments between the borrower and the lenders and keeps the official record of who holds what. The lender's operations team books the loan in its systems, sets up interest schedules, and makes sure cash goes out and records match.

From first contact to closing is often a few weeks to a few months, depending on complexity and competition. Speed and certainty of execution are one of the main reasons borrowers choose private lenders (lesson 1.3).

Monitoring

After closing, the lender's job shifts to watching the loan. Typical monitoring includes:

• Monthly or quarterly financial statements from the borrower, reviewed against budget and prior periods.
• Compliance certificates, in which the borrower's officers confirm whether it meets its covenants and show the calculations.
• Regular calls with management and the sponsor, especially if performance weakens.
• Internal risk ratings and watch lists that flag loans needing closer attention.
• Quarterly valuations that feed the fund's NAV (lesson 4.2).

Private lenders usually get more information, and get it more often, than holders of public bonds. Using it well is how lenders spot problems early, while they still have options.

Exit

A loan ends in one of several ways:

• Scheduled amortization and maturity. The borrower repays small amounts over time and the rest at maturity.
• Refinancing. The borrower replaces the loan with new debt, perhaps at a lower spread or from a different lender. Call protection (lesson 3.2) compensates lenders for early repayment in the first years.
• Sale of the company. When the sponsor sells the business, the loan is normally repaid from the proceeds.
• Restructuring. If the borrower can't meet its obligations, lenders may agree new terms, extend the maturity, or in severe cases take control of the company.

Many private loans are repaid well before their stated maturity, usually through refinancing or a sale. That is why yield calculations assume a shorter life than the legal term (lesson 3.3).

Key terms

• Origination: finding and sourcing lending opportunities.
• Due diligence: the detailed investigation of a borrower before lending.
• Quality of earnings (QoE) report: an accountant's report that tests and adjusts a company's reported earnings.
• Credit memo: the deal team's written analysis and recommendation for the investment committee.
• Investment committee (IC): the group of senior investors who approve or reject loans.
• Credit agreement: the legal contract setting out the terms of a loan.
• Administrative agent: the party that handles payments and records between a borrower and its lenders.
• Compliance certificate: a borrower's periodic confirmation of whether it meets its covenants.

Key takeaways

• A private loan moves through origination, screening, due diligence, IC approval, documentation, closing, monitoring and exit.
• Most deals are rejected at screening. Diligence, especially the quality of earnings report, underpins loan size and covenants.
• Legal counsel drafts the credit agreement; operations and the agent handle funding, payments and records.
• Monitoring through regular financials and compliance certificates helps lenders spot trouble early.
• Most healthy loans end through refinancing or a sale of the company; restructuring is the path when things go wrong.