A client offered me a $100k slot in his debt fund, and I run a service business

A gate means the fund can limit how much comes out in any one redemption window. So if a lot of LPs ask for money back in the same quarter, the fund pays out up to a cap, say 5 percent of net asset value, and everyone gets a pro rata slice of that cap with the rest queued to the next quarter. It exists because the fund's assets are loans that mature on their own schedule and can't be sold quickly at par.

Which means quarterly liquidity is real in a normal quarter and gone in the quarter you'd most want it. Ask for the exact gate language and the notice period, in writing.

"He's an equity guy who hired someone who has done this" and you haven't met the hire. Meet the hire. That's not optional at $100k.

Some questions I'd want answered before I'd think about it, and I ask a lot of questions before I do anything.

How are the loans priced and how does 9 percent to me come out of the borrower rate? If borrowers pay 11 and the fund charges 1 percent plus takes carry over 8, work out where the 9 comes from and whether it survives one loan going bad.

Is the fund using a credit facility to boost returns? A debt fund borrowing to lend changes the risk a lot and it's often in the documents rather than the pitch.

What's the concentration limit per borrower and per loan? One loan at 8 percent of the fund is different from one at 25 percent.

What does the LTV get measured against, the as-is value or the stabilized value? 70 percent of a stabilized appraisal on a building that isn't stabilized yet is a much thinner cushion than it sounds.

@anchor that last point is the one I'd underline. As-is versus as-completed changes the whole meaning of 65 to 70 percent, and different lenders use the terms loosely in marketing material.

I'm reading everything twice at the moment and this thread is helping. Can someone explain the difference between the 9 percent current pay and the 8 percent pref? They sound like the same number to me but they're both listed.

@juniper the 8 percent pref is the hurdle. LPs get paid up to 8 percent a year before the manager takes any share of profit. The 9 percent current pay is what they're aiming to distribute in cash each quarter. So if they hit 9, the first 8 is yours alone and the manager starts sharing above that. If they only earn 6, the manager gets nothing on carry and the shortfall may or may not accrue depending on whether the pref is cumulative. @thatch find out if it's cumulative, that word matters.

Is 9 percent good? I have no reference point, so I genuinely can't tell. Compared to what?

@compass compared to what you can get on senior secured multifamily paper from someone with an actual origination history, which is the whole point. A first-time manager offering the same headline number as an established one is asking you to take extra risk for the same pay. That's what I'd argue with him about, and it's the strongest position @thatch has since the client relationship runs both ways.

The quarterly cash is why this appeals and I get it, I want income without a second job too. But I'd want to know whether the distributions are paid out of interest actually collected or out of accrued interest that hasn't arrived. Some bridge loans capitalize interest, which means the borrower isn't paying monthly and the fund is distributing cash from somewhere else. That works until it doesn't.

14 months of profit from a business you run yourself, into a first-time fund managed by a client. Think about what happens to the client relationship if the fund underperforms and you're both sitting on that. I've had a version of this with a customer and it cost me the account and the money took three years to come back.

Halve it. If the minimum is $100k, ask whether he'll take $50k from you as a smaller commitment, and if he won't, that also tells you something about how the raise is going. Patience is usually free in this business.

@orchard I'd read a hard no on that differently. On a $50M raise, a sponsor holding the minimum firm across 100 plus investors is normal administration, not desperation.

@thatch here's what I'd push on: get the loan tape from whatever he's done so far, even if it's warehoused loans made off his balance sheet before the fund closed. First-time funds often season a few deals first. Two or three actual loans with real borrowers and real payment histories is worth more than the whole deck. And have a securities attorney read the documents before you commit anything.