7 Red Flags to Watch for When Evaluating a Private Credit Fund

Private credit has exploded as an alternative fixed income strategy, especially in today’s high-rate environment. But as investor appetite grows, so does the number of funds competing for your capital. The truth is simple: not every private credit fund deserves your trust.

Before committing hard-earned money, accredited investors—whether physicians, attorneys, tech executives, or business owners—must know the warning signs that could signal weak underwriting, poor management, or unnecessary risk exposure.

Here are seven red flags to watch for when evaluating a private debt fund.

1. Lack of Transparency

A high-quality private credit fund should provide:

• A clear investment thesis
• Regular performance reporting
• Detailed information on loan portfolios

If a fund avoids sharing track records, underwriting standards, or portfolio breakdowns, that’s a serious red flag. Transparency builds trust—without it, you’re flying blind.

2. Vague or Aggressive Promises of Returns

Be cautious of funds promising double-digit yields without context. Solid funds emphasize risk-adjusted returns, collateral, and borrower quality. Empty promises of “guaranteed high returns” suggest marketing over discipline.

Remember: if it sounds too good to be true, it probably is.

3. Weak Collateralization

One of the core advantages of private credit is asset-backed lending. If a fund originates unsecured loans—or collateral that’s difficult to value or enforce—your downside protection disappears. Always ask:

• Are loans secured by first-lien real estate or other tangible assets?
• What’s the average loan-to-value (LTV)?
• How is collateral monitored and liquidated in default scenarios?

4. Overconcentration in Risky Borrowers

Diversification is critical. A red flag appears if a fund lends too heavily to:

• Borrowers with weak credit histories
• Highly speculative real estate projects
• Concentrated industries (e.g., only construction or only hospitality)

A disciplined fund spreads risk across borrowers, geographies, and loan types.

5. Unclear Origination and Underwriting Process

Where do loans come from? Who vets them? A strong fund has a proven pipeline of borrowers, clear origination channels, and strict underwriting standards. If the process seems ad hoc or opportunistic, risk skyrockets.

Look for funds with long-standing relationships with brokers, developers, and borrowers—plus a repeatable, disciplined credit filter.

6. Misaligned Fee Structures

If managers get paid regardless of fund performance, your interests aren’t aligned. Watch for:

• Excessive management fees
• Lack of performance-based incentives
• Hidden costs (like servicing or transaction fees)

Best-in-class funds structure fees so managers succeed only when investors succeed.

7. Limited Track Record or Unproven Team

Every manager was once new—but you should be cautious of teams without experience navigating full market cycles. A red flag is a fund run by managers who:

• Have little or no real estate lending background
• Lack a history of disciplined risk management
• Have not managed through downturns

History doesn’t guarantee future results—but experience matters in private credit.

How to Protect Your Capital

When evaluating private debt funds, accredited investors should:

• Ask tough questions about collateral, borrower vetting, and default history
• Request detailed performance reports (not just marketing decks)
• Verify alignment of interests through fee structure and reinvestment policies
• Check third-party audits or independent fund administration for credibility

Why LBC Capital Income Fund, LLC Is Different

At LBC Capital Income Fund, LLC, we built our reputation by putting investor protection first. Our model is designed to eliminate the red flags we see elsewhere:

• Full transparency: Regular reporting, audited financials, and clear loan-level data
• Collateral-backed lending: First-lien positions on California real estate
• Disciplined underwriting: Conservative loan-to-value ratios and borrower screening
• Alignment of interests: Our management team invests alongside clients

We don’t chase yield at the expense of discipline. We build portfolios designed to preserve capital, generate income, and grow wealth responsibly.

Discipline Over Hype

The private credit space is filled with opportunity—but also with risk if you don’t know what to look for. By recognizing these seven red flags, investors can separate disciplined funds from dangerous ones.

When evaluating where to place your capital, remember: strong underwriting, real collateral, and transparency will always beat hype and high promises.