Not every alternative investment makes you an owner. In private credit — debt funds, mortgage funds, hard-money deals, and individual promissory notes — you’re the lender. That changes the whole risk profile, and it changes the questions you should be asking. You’re no longer wondering how the profits get split. You’re wondering whether you get paid back: where you stand if the borrower defaults, what actually backs the loan, and who’s left holding the bag if it all goes sideways.
Here’s what a private debt or note deal should make clear before you commit a dollar.
Where You Sit in the Capital Stack
The single most important question in a debt deal is your priority — where you rank against the other creditors and the equity. Are you in first position, senior and paid first out of the collateral? Or are you subordinated, sitting behind a senior lender who gets made whole before you see anything? Is your investment secured, unsecured, or “mezzanine” debt wedged between the senior debt and the equity?
When a deal goes bad, this is what matters most. I’ve watched a senior secured lender come out whole on a deal where the subordinated lenders and the equity were wiped out entirely. The difference between those outcomes came down to position, nothing else.
What Backs the Loan
A loan is only as good as the things you can fall back on when the borrower stops paying. The documents should spell out:
- Collateral. Is the loan secured by real property, equipment, or other assets — and does the lender actually hold a properly recorded lien, whether a mortgage, a deed of trust, or a UCC filing?
- Loan-to-value (LTV). How much is being lent against what the collateral is worth? A lower LTV leaves more cushion when the asset’s value drops, and assets do drop.
- Personal or corporate guarantees. Is anyone personally guaranteeing repayment, and is that guarantee worth the paper it’s printed on?
- Valuation. Where did the collateral’s value come from — an independent appraisal, or the sponsor’s own back-of-the-envelope estimate?
The Terms of the Loan Itself
Then there’s the mechanics of getting paid: the interest rate and how it’s calculated, the term and maturity, and whether interest is paid to you currently or quietly accrued. Watch for a deal that leans on an interest reserve — borrowed money set aside to cover the early payments. It can mask trouble for a good while, and by the time the reserve runs dry the problem may be much harder to fix. Find out, too, how prepayment works, and what’s supposed to happen at maturity if the borrower can’t repay or refinance.
What Happens in a Default
This is where debt deals are won or lost, and it’s usually where the disclosure is thinnest. The documents should lay out the default remedies — your right to foreclose on the collateral, enforce a guarantee, or chase the borrower — along with some honest sense of the timeline and cost of doing any of it. A right on paper is only worth what you can actually enforce, and foreclosure tends to be slow, expensive, and a good deal messier than the offering deck suggests.
Fund-Level Questions
Investing in a debt fund rather than a single loan adds another layer. How diversified is the loan portfolio, or is it really a few large loans wearing a fund’s clothing? Who underwrites and services the loans, and what’s their history doing it? How does the fund value and handle the loans that go into default? And does the fund borrow money of its own to lend — leverage that magnifies the return in good times and the losses in bad ones?
Reading It the Right Way
Private credit can generate income that’s more predictable than what you’d see in an equity deal. But more predictable is not the same as safe, and the protections that make a debt deal sound aren’t in the pitch — they’re in the loan documents, the security instruments, and the offering terms. Confirming your priority, the collateral, the guarantees, and the default remedies is precisely the close reading a legal review is built for. And as with any private deal, missing or vague documentation on these points is itself a red flag.
Investor Diligence is a service of Waypoint Law PLLC, a Minnesota-based law firm serving investors nationwide. This article is for informational purposes only and is not legal or financial advice, and reading it does not create an attorney-client relationship. Investment decisions are yours to make.
Considering a private debt or note deal? Get a legal review of your investment or schedule a discovery call.