They say that the era of easy money is over.

I. Yet, private credit is booming. Non-bank, non-financial institutions such as PE fund managers directly lend money to various borrowers including to other PE fund managers to provide leverage for their acquisitions.

II. Record fundraising by local funds. The second funds of the pioneering VC and PE funds that have originated from Bulgaria and have expanded geographically across South East Europe accumulated significant amounts of dry powder. To illustrate: Black Peak raised 126 million euro in their SEE Growth Equity Fund. Eleven Ventures closed 60 million euro SEE fund. BrightCap’s new successor fund targets 60 million euro. Invenio Partners raised over 55 million euro in its second regional fund.

Red flags, a selection, without limitation:

I. 1. Lack of institutional knowledge, data and expertise. Having been a borrower for decades does not in itself qualify you as a lender instantly. Think of the small, compact teams of a PE house, and compare with the armies of bankers and the support they have.
I. 2. Profitability of loans exceeding profitability of equity and at a lower risk.
Re. profitability. The higher the interest rates and fees extracted from a business, the less profit and cash remain in the business to expand and reinvest. The risker the long-term repayment of the loan becomes.
Re. risk. Equity claims get paid only after creditors have been satisfied. Plus, what could go wrong, if a debtor defaults, creditors can take over the business. See, there is the issue: if situation has deteriorated so far, such business has been struggling and may be bankrupt, beyond repair and saving. A lender should quickly become an operator and find the resources to save or salvage the business. A simple refinancing may not be feasible and will hardly suffice (it generally means writing off debts, high costs of restructuring, divestments below costs/distressed sales, etc.). In other words, more costs on top of the bad loan.
I.3.Overall, extremely popular and very profitable new asset class but disproportionately risky. And when the risks materialise and turn into losses, the damage will need to be contained. First, it will be the existential threat to the borrowers’ businesses that will not be able to sustain the amount and cost of the new debt. Second, it will be the investors/GPs money melting away.

II. The new funds have quickly started to invest their investors’ money. For example, Black Peak invested in Wiser Technology (former Bianor Holding). Invenio Partners funded Nasekomo.

In a highly competitive environment, tons of easy money, speed of dealmaking takes precedence and red flags and due diligence could be essentially ignored. Investing other people’s money is a responsibility. Bad investing will ultimately damage brands and reputations. Professional advice is not a commodity. If you bargain and pay for commodity, you, and your investors indirectly, will get a commodity quality, and no or little added value.