Two funds at the same 9 percent net, and time to diligence one thing

I voted tape and then realized I don't know what's on one. Is it a spreadsheet with a row per loan, or is that the summary they send everyone? Every fund I've asked has sent me a one page thing with average LTV and a pie chart by state, which I assume is not what you all mean.

Tape, and it isn't close for me. A workout record is a story the manager chose to tell you. A tape is a set of numbers that either reconciles to the NAV statement or doesn't. What I want per loan: original balance, current balance, lien position, origination date, maturity date, extensions taken, appraised value with the basis stated, days past due, and interest reserve remaining. That last column is the one people skip and it's where a bridge book hides its problems, because a loan funded with twelve months of reserve is current by construction until the reserve runs out. Sort by maturity, then by reserve balance, and you can see the next four quarters before the manager writes about them.

I'd fold vintage into the tape rather than treat it separately. A book originated against 2021 and early 2022 values carries a different cushion than one written in the last eighteen months at repriced values, even at identical stated LTV, and the origination date column tells you that for free. Geography does the same job. Two funds at 65 percent average LTV where one is spread across secondary markets with slow price movement and the other is concentrated in three metros that ran hard and gave it back are not the same fund.

Documents. The tape describes a moment. The LPA describes every moment after it. The clauses I read first are what constitutes a modification versus an extension, whether the manager can extend without it being called a modification and how many times, who has discretion to suspend redemptions and on what test, and whether the promote is calculated on accrued or collected interest. A fund can have a spotless tape and a document set that lets the manager hold your capital for two years while the promote keeps accruing. Verity, ask both managers for the current LPA and the most recent amendment, and read the amendment first.

Some definitions, since a few of these terms are doing heavy work in the thread.

A loan tape is the loan-by-loan schedule of everything the fund holds, one row per loan. What vellum described, the one page with averages and a pie chart, is a portfolio summary. Averages hide the shape of a book. A fund with an average LTV of 65 percent might hold everything between 60 and 70, or it might hold a lot at 55 and a handful at 85, and only the row-level file tells you which.

Non-accrual means the fund has stopped booking interest income on a loan because it no longer expects to collect it. Until a loan is moved to non-accrual, interest can keep showing up in the fund's reported yield even though no cash arrived.

A gate is a provision letting the manager limit or suspend redemptions, usually when requests in a quarter exceed a stated share of net assets. It exists so the fund isn't forced to sell loans cheaply to pay exiting investors. It also means your exit date is a request rather than a certainty.

On the choice in the poll, the chapter this room is built on puts it plainly: the primary risk in debt investing is borrower distress exceeding the collateral cushion, which makes the vintage and concentration of the loan book the thing to examine. That points at the underlying portfolio. The fund documents decide what happens to you once distress shows up. Both funds should give you the loan schedule and the current governing documents in writing, and anything in those documents you're relying on should be reviewed by an attorney, since fund terms and how they're enforced vary.

I want the tape sorted three different ways before I care about anything else. Weighted average LTV by origination year, dollar concentration by borrower, and dollar concentration by property type. Sextant is right that averages hide dispersion, and the fix is cheap. Run the standard deviation of LTV across the book. Two funds quoting 65 percent where one has a 6 point spread and the other a 19 point spread are running different businesses. What's wrong with using that as the first screen and only then asking about the manager?

On any construction or heavy rehab loan the LTV column on the tape is close to fiction without knowing how the manager runs draws. I've been on the receiving end of both kinds. One lender sends an inspector before every draw, holds retainage, checks lien waivers. The other funds off photos and a spreadsheet from the borrower. Same loan, same stated 65 percent, completely different actual exposure, because the sloppy one has already funded work that isn't in the ground. So for a book with construction in it, I'm voting manager, and the question I'd ask is who inspects and how often.

Dumb question from the back. If the loan pays every month, does any of this matter to me, or is all of it about what happens when it stops?

rigging, it's all about what happens when it stops, and that's exactly why I voted manager. Originating a loan at 65 percent is not hard. Collecting on it is a specific operational skill involving servicers, counsel in whatever state the property sits in, tax and insurance advances, and someone willing to finish or sell a half-done building. Recovery rates across the same LTV band vary enormously by who's doing the work. Ask for completed workouts only, with the dates. Anything still open is a forecast.

There's a check size problem nobody's said out loud. At 25k I'm not getting a loan tape from anyone. Two of the three funds I asked told me the schedule goes to institutional LPs and I get the quarterly report. So for someone at my size the poll collapses to documents, because the PPM and the LPA are the only things they're obligated to hand over.

Manager, and I judge it by one thing: ask a hard question and watch the shape of the answer. I asked one about their worst loan of the last three years and got a specific address-free story with numbers, including what they got wrong. The other gave me a paragraph about their disciplined underwriting culture. That told me more than any spreadsheet would have.

What happens if the tape they send is three months stale? The one I got was dated at the prior quarter end and by then they'd originated another sixteen loans. Am I diligencing a book that no longer exists, and is it reasonable to ask for a current one or does that mark me as difficult?

compass, ask for two, a quarter apart. That's what I do, and the comparison is worth more than either one alone. You see which loans moved to non-accrual, which took extensions, whether balances rolled or paid off, and how fast the book turned. A single tape is a photograph. Two tapes is the beginning of a direction. It also tells you whether their reporting is consistent, because I've seen columns change definition between quarters.

I asked for a tape and got a portfolio summary with a note that loan-level detail is confidential to protect borrower privacy. Which I half believe. Is there a middle version people accept, like anonymized rows with the borrower name stripped and the property described by type and metro? That would give me everything ledger and sextant are after without naming anybody.

Anonymized rows is the standard ask and most decent shops will do it. If they won't strip names and hand over the schedule, that's your answer.

I voted documents for a reason that's specific to me. I need this money on a known date for a purchase, so the gate provision is the term that decides whether the fund is usable at all. A great tape and a discretionary suspension clause still leaves me unable to plan. The redemption mechanics, notice period, queue treatment and any lockup are the first four pages I read now, before the returns.

Adding to girder's point. Lender-placed insurance and how fast they catch a lapsed policy is a small operational thing that turns into a total loss if a property burns while uninsured. Nothing on the tape shows you whether the servicer is watching that. It's a manager question.

I've been building a comparison sheet for six funds and the column that separates them most is origination year, exactly as arbor said. Two of them wrote most of their current book in 2021 and 2022 and have been extending since. The stated LTV hasn't moved because nobody's reappraised. That's a tape finding and a document finding at the same time, since the LPA decides how often collateral gets revalued.

Coming back after reading this. I've moved to documents. I didn't know what a gate was this morning and now it's the thing that scares me most, because everything else in this thread is about a loss I might take and the gate is about not being able to leave at all. Thanks for the definitions, that was the missing piece.

sextant, I'll take your side on one thing. A tape reconciles or it doesn't, and that's a real test the documents can't give you. Where I still disagree is that the tape can't tell you what the manager is permitted to do next. Current book at 12 percent office exposure means nothing if the LPA permits 35 and the manager has been drifting toward it. Read the hard caps and assume they will eventually be used.

Every LPA I've read in this space, and it's a decent number now, gives the manager discretion on the gate rather than a mechanical trigger. The language is usually something like the general partner may suspend redemptions if it determines that satisfying them would be materially adverse to remaining investors. That's a judgment standard, and you're relying on the manager's judgment at the exact moment their interests and yours diverge. The other clause I'd flag for verity is the valuation policy for a loan in default. If the fund holds a non-accrual loan at par until a sale, the NAV you redeem at is overstated and the last people out eat it. Ask who sets the reserve, on what schedule, and whether anyone independent reviews it. Any conclusion about how these clauses would actually be enforced needs a lawyer, since it turns on the governing documents and the state they're written under.

fathom and warrant have moved me part way. I'll concede that the valuation policy for defaulted loans is a document question the tape can't answer, and it's material to what I redeem at. I won't concede the main point. Document sets in this segment are more alike than different, drafted from a handful of templates, while the dispersion between two funds' actual loan books is enormous. If everyone's paperwork is roughly the same, the paperwork can't be what distinguishes them. The tape can.

sextant's point about templates matches what I've seen. Three of the four PPMs I've read were structurally identical. The books behind them were nothing alike.

I do all four, and if forced to rank, the tape without servicing notes is thinner than sextant is allowing. A row that reads current tells you a payment arrived. It doesn't tell you the payment came from a reserve the fund itself funded at origination, or that the borrower called three weeks ago asking about a forbearance. So I ask for the tape and then ask for the last five completed workouts including the one that went worst, and I cross the two. If the workout list has no bad outcome in it across a three year book, either they've been lucky or they're not showing me everything, and both are worth a follow-up question.

Borrower quality shows up long before a missed payment, and property management is where you see it. Deferred maintenance, staff turnover, vendors not getting paid. A lender who never visits collateral finds out last.

Running numbers on canton's point. Take a 60 loan book, equal weight, no fund leverage. One loan going to a total loss costs you about 1.7 percent of NAV, which a 9 percent coupon absorbs. Now make it a fund where the top five borrowers are 30 percent of the book and one of them fails. That's 6 percent, and you've given back most of a year plus change. The binding constraint is concentration, and the permitted cap matters more than the current figure, which is warrant's argument arriving through arithmetic.

The right answer moves with access. At institutional size you get the tape, the servicing notes and a call with the credit committee, so you'd be foolish to spend your effort on boilerplate documents. At 25k, tally is right that the documents are all you have, so that's where the effort goes. Verity, which of those are you? That determines the answer more than anything in this thread.

I voted tape and I'm now fairly sure I was wrong about myself. I could read every row and I'd have no basis for saying whether 68 percent on a 12 unit in a secondary metro is fine or aggressive, because I've never underwritten one. Reading a tape you can't interpret feels like diligence and isn't. So I'm going manager first until I've seen enough loans to have an opinion.

One number I'd add to whichever route you take. Ask what share of default interest they've actually collected versus billed over the last three years. Most funds bill it and collect very little, and a manager who quotes yields including accrued default interest is showing you money that mostly never arrives.

The vintage question is the one that got me on a much smaller scale. I refinanced two properties in 2021 at values that hadn't been tested and it took me until last year to feel the difference. A book full of loans written against those same values, extended twice, never reappraised, is carrying a cushion that exists on paper. If I could only run one screen it'd be origination year against last appraisal date, and any loan where those are more than two years apart gets a question.