Family offices are increasingly turning to private credit as a major component of their portfolios – but there are some legal considerations for firms to take, according to law firm Katten.
The firm said that the top things to consider include ensuring family offices are comfortable with illiquidity, have adequate structural protections in downside scenarios, and have considered the regulatory and tax implications of investing in private credit.
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“Private credit is, by definition, less liquid than public debt. Family offices will need to be comfortable with longer lock-up periods and the potential for delayed repayment. Legal review of redemption, collateral and payment rights, transfer restrictions, and secondary market options is important to fully understand the investment’s liquidity profile and repayment risk,” the firm said.
“Secondly, structural protections are paramount. Loan documentation should be scrutinised for covenants, collateral packages, inter-creditor arrangements and default remedies. Family offices should ensure they have adequate protections in downside scenarios, including clear enforcement rights and priority in the capital structure.
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“Third, regulatory and tax considerations can add a layer of complexity. Family offices should work with legal and tax advisors to understand the implications of investing in private credit funds or direct loans, including withholding taxes, reporting obligations and potential regulatory filings.”
It added that there needs to be an alignment of interest among the family office, their investment manager and the borrower, and firms should seek “robust financial reporting frameworks that promote transparency and accountability”.
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