Stop Checking Boxes on a Debt Fund. Start Grading the Numbers.

I've sat across from a lot of investors who did their homework on a debt fund and still got surprised later. Not because they skipped diligence, but because the diligence they did was built on a checklist, not a grading scale. The problem is checklists only give you a “yes” or “no”.

Does the fund invest in first-position liens? Yes.
Is there any fund-level leverage being used? No.
Does the fund hold adequate reserves? Yes.

Three green lights. Feels solid. Yet this fund can still be one of the more fragile funds in the room, because almost none of those questions are actually binary; rather, they are ranges. Where a fund sits on the range matters a lot more than whether it clears the bar at all.

Why "yes or no" isn't good enough

Take loan-to-value. A fund lending at 65% LTV and a fund lending at 78% LTV can both answer "yes, we underwrite conservatively" on a call with you. Same answer but not the same risk. The gap between those two numbers is the cushion that exists before a bad loan turns into a bad quarter for the fund's investors.

Same story with market concentration. A fund can tell you, truthfully, that it's diversified across markets. But diversified across three markets with 40% sitting in one metro is a different animal than diversified across a dozen markets with no single market concentration above 15%. Both funds can say the word "diversified." Only one of them has actually built-in protection against a local downturn.

This is the part most diligence checklists miss. They're built to confirm a safeguard exists. They were never built to tell you how much of that safeguard you're actually getting.

The seven numbers worth grading

Here's what I'd put on the list, and roughly what strong looks like on each one:

• Loan-to-value at origination. Institutional lenders generally target the 60-70% range. Above 75-80%, the margin of safety starts eroding fast, even on loans that are performing fine right now.
• Borrower experience. A first-time borrower and someone who's completed ten deals are not comparable risks on the same property. Disciplined lenders size leverage by experience tier, not just by asset value.
• Market concentration. A conservative guideline keeps any single market well under 15-20% of the total portfolio.
• Liquidity, measured by recycle rate. Not just loan duration. How many times a year that capital actually turns over and comes back to work.
• Fund-level leverage. Zero leverage at the fund level means investor capital absorbs losses directly, with nothing amplifying the downside. Even modest leverage changes how a cluster of bad loans plays out.
• Default rate and resolution speed. The rate is half the story. A fund that resolves a default in a few months is a different experience than one where recovery drags a year or more, even if both started at the same default number.
• Reserves, as a coverage ratio. Not a flat dollar figure. How many months of stress the fund can absorb before it touches your distribution.

None of these ranges are pulled from a single published standard; rather, they reflect how institutional lenders generally underwrite. Use them as a directional guide when you're evaluating a fund, not a rulebook to recite back to a manager.

Where investors get tripped up twice

The first mistake is treating these as pass or fail metrics. The second, quieter mistake is assuming the numbers add up simply. They don't. A fund can land in a comfortable range on six of the seven metrics and still be carrying real risk if two or three of the weaker numbers happen to point in the same direction at once. Thin reserves, a slow recycle rate, and heavier market concentration showing up together is a worse combination than any one of those numbers looked at alone.

And there's a verification problem underneath all of it. A manager can hand you an investor deck with a metric number. Whether that number is real is a different question.

Two investors, same checklist, different outcome

An investor I worked with last year was comparing two debt funds side by side. Both cleared her checklist. Both had first-position liens, no fund-level leverage, and quarterly reserve disclosures on paper.

Fund A gave her a written LTV range on request, backed by loan-level data she could actually review. Around 63% average at origination, with the largest single market exposure sitting under 12% of the portfolio.

Fund B told her, verbally, that they "underwrite conservatively" and that concentration "wasn't a concern." No numbers. No documentation. When she asked a second time, she got the same answer, worded slightly differently.

She passed on Fund B. Six months later, it paused distributions after a cluster of loans in one market went sideways at the same time. The exact compounding pattern where weak numbers stack in the same direction. Fund A kept paying on schedule.

Same checklist. Same yes-or-no answers going in. The difference showed up the moment she asked for the range instead of the reassurance.

The question worth asking yourself right now

Do you actually know your current fund's LTV at origination? Not the general reassurance. The number. Could you get it verified if you called and asked today?

Most investors can't answer that. Not because the information doesn't exist, but because nobody's asked for it directly, and most managers aren't offering it up front.

The ranges themselves aren't the hard part. You could learn all seven in an afternoon. Getting a manager to actually show you verified numbers instead of talking around them, that's the part that trips people up, and it's usually where a second set of eyes is worth more than another hour of research on your own.

Send me a DM if you want to walk through what you found.