How to Evaluate a Private Debt Fund Like a Pro (Even If You’re New to It)

Jumping into private debt funds can feel like entering a hidden marketplace. Promises of stable income and portfolio diversification can be attractive—but how do you sort the winners from the rest, especially when you’re new to the game?

As accredited investors ourselves, we learned that serious homework pays off. This guide lays out a pro-level process for evaluating private debt funds – no finance degree required. By the end, you’ll feel confident making informed decisions, not playing catch-up.

1. Know the Fund Focus and Strategy

Start with the foundation. What exactly does the fund invest in?

Does it specialize in short-term loans to real estate professionals or corporate lending for mid-market firms? Are deals tailored for income, or does it stretch for growth? Tools like Yieldi highlight how private debt funds can vary from direct lending to broader private credit strategies.

Ask:

• What industry or asset types are targeted?
• Are loans short-term or long-term?
• Is interest fixed or floating?

Clear answers here prevent surprises down the road.

2. Track Record & Performance Metrics

A fund’s performance is more than its headline yield. Look deeper:

• Vintage or Launch Year: Age matters. Can they show performance across multiple economic tweaks?
• Quarterly NAV & Distributions: Watch for consistency; regular income without erratic write-downs is a strong signal.
• Default or Loss Rates: Private debt typically sees ~0.9% default annually—reasonable if handled.
• Yield vs. Peer Benchmarks: Compare the fund’s net yield to other private debt averages (usually 8–10% gross, 6–8% net).

You want a fund that delivers constant, clear returns – not just spikes followed by drop-offs.

3. Scrutinize Underwriting and Risk Controls

Interest rates can add to income, but poor credit underwriting adds to losses. Key questions:

• Collateral valuation: How do they assess loan value? What LTVs are used?
• Borrower vetting: What financials, history, and stress tests are required?
• Covenants and controls: Does the fund proactively monitor loan covenants and KPIs?
• Default response rules: How are troubled loans detected, escalated, or restructured?

If the fund can’t answer these in detail, trouble’s quietly building.

4. Portfolio Construction & Diversification

A big bet can sink the ship. What’s your exposure?

• Deal concentration: One large loan can hurt; does the fund spread risk across deals?
• Industry and geography: Are you overloaded in one region or type of deal?
• Hold times: With shorter loans, capital recycles quickly—meaning quicker adaptation.

Alignment with your risk comfort means knowing exactly what you own, and why.

5. Fees, Expenses, and Waterfall

The math matters. Hidden costs can eat a meaningful portion of your returns.

• Management fees: Usually 1–2%. Are they reasonable for what you get?
• Performance or incentive fees: Find out structure; is it aligned with investor success?
• Liquidity terms: Notice periods, redemption iffy? They impact when—or if—you can exit.

When fees are clear and structured, net returns align with expectations. If not, be wary.

6. Transparency and Investor Communication

You’re entrusting capital. Expect receipts.

• Reporting frequency: Quarterly a baseline? Monthly ideal.
• Access to deals: Can you see loan-level info?
• Team responsiveness: Are questions answered clearly—or met with boilerplate?

Funds that let you in the door tend to value and respect your investment.

7. Red Flags – Don’t Ignore Them

Trust your instincts. Walk away if you see:

• No clear investment documentation
• Vague performance claims without supporting data
• No team bios, no track record
• Hidden liquidity terms or lockups
• Leverage or complex structures not clearly explained

The red flags you ignore today can become tomorrow’s capital loss.

Bringing It All Together

Let’s run through a practical example:

LBC Capital Income Fund, LLC Fund might tick your boxes:

• Invests in short-term real estate loans
• 13+ years of consistent distributions
• 8%–8.5% annualized net yield
• Conservative underwriting and low leverage
• Monthly reporting and transparent fees

Compare that to a fund that calls itself “private credit” but lacks documentation, hides fees, or fails to show NAV transparently—you’d see where clarity pays off.

Final Checklist: Before You Invest, Ask:

Take the Next Step with Confidence

Evaluating a debt fund isn’t easy – but you don’t have to be an analyst to do it right. Ask the right questions. Push for transparency. Run through your own checklist before committing capital.

If you want to model sample returns – or compare fund data – let’s set up a conversation. At LBC Capital Income Fund, LLC, we believe a well-informed investor makes the best partner.

Ready to build income with purpose and clarity? Let’s connect.