Three years into a lien fund and the distributions arrive when they say

What did the agreement say about the missed quarter? Some of these give the manager broad discretion to suspend distributions for reserves and some tie it to a defined test. Also curious whether the pref was cumulative, because if it was, the 20% split shouldn't have started again until the shortfall was made whole. Sounds like it was, from your description, but that's the clause I'd want quoted.

The aging schedule is the right thing to have been watching. What did it look like at the end? If a fund is holding certificates past the redemption period at any real volume, the yield you're being shown is partly an accrual on paper and partly a bet that foreclosures convert. marlow, did they disclose what percentage of the book was past redemption and what average recovery they got on the deeds they sold?

The foreclosure cluster is where I'd look harder. When a lien fund takes a deed it becomes a land owner with mowing bills and tax bills and no tenant, and that is a completely different business from collecting statutory interest. One cluster in one county sold and made you whole. A fund that ends up with 40 parcels in a county where nothing moves has a much longer letter to write.

7.4% net for genuinely passive, with one skipped quarter over twelve, is a decent outcome for the risk shape. The thing you were actually buying is that the manager takes the county-by-county deadline work off your desk. That's what the 2% is for and it's worth something.

warrant asked the right question. I'd add: check whether the management fee was charged on committed capital or invested capital, and whether it was on cost or on some internally marked value. If it's on a marked value and the marks include accrued interest on certificates that haven't redeemed, the manager is getting paid on income nobody has collected yet. That's legal and common and it should change how you read the 7.4.

Working backward from the fees: to net you 7.4 after 2% management and a 20% carry over a 6% pref, the gross has to be somewhere around 11.5 to 12%, and that's before whatever the fund spent on legal in the foreclosure cluster, which may have sat inside the portfolio rather than in the fee line. So the operation was earning close to the statutory rate on face across the book with very little premium drag. That's the number that tells me they were bidding with discipline, more than the distribution record does.