Private creditPassive income
How much leverage is too much in a private credit fund?
Our line is under one times, meaning the fund borrows less than a dollar for every dollar of investor money.
How does Ocean Ridge evaluate a private credit fund?
We set the headline yield aside, because they all quote about the same number. We check what actually sinks a credit fund, in order. How far the property can fall before your dollar is at risk. How much the fund borrows. How long the loans run. What it has really lost after recoveries. And how it handled its worst loan.
For educational purposes only. Nothing on this page is investment, legal or tax advice, and nothing here is an offer to buy or sell any security. Ocean Ridge Capital Partners, LLC is not a registered investment adviser, broker-dealer, law firm or accounting firm.
What this question is really asking
You built a business that pays you. Most of your net worth probably pays you nothing. Private credit is the obvious fix, and then you open six decks that all say about 12%. Nothing on the first page tells them apart. What does is how each fund behaves when borrowers stop paying, and that is rarely on the first page.
What order do you check things in?
We have spent more than a year talking with over 50 private credit managers. Most sounded the same on the first call. This is the order that separated them.
- Cushion. How far can the property’s value fall before your dollar is at risk? Ask for loan-to-value, the loan as a share of the property’s value, measured to the last dollar of your position. If the collateral is worth less than the loan, stop.
- Fund borrowing. Borrowing at the fund level magnifies both the yield and the losses. #43 shows the math.
- Loan length. Shorter loans limit how long you can be wrong.
- Real losses. Not the default rate. What was lost after the workout and recovery.
- Depth of record. How many years and how many loans, and did that stretch include a hard market?
- Recovery. What happens on day one of a default, and what has the manager gotten back before?
- Exit. When can you actually get out, and what can close that door? (See #46.)
Most people skip number four. Default rates get quoted. Losses after recoveries get buried.
Does first position or mezzanine matter?
Yes, but it is a price, not a verdict. A first-position loan is paid first and usually pays less. A mezzanine loan sits behind the senior lender and pays more for standing further back in line. Either can be sound. The questions are how much equity sits below your dollar, and whether the extra yield pays you fairly for your place in line. A 9% first lien and a 12% mezzanine loan can both be good investments, or both be bad ones.
What breaks a tie?
When two funds look alike, five things separate them. Whether the loans are insured. How much the borrowers move together, with each other and with the economy. How the income is taxed for you. How good and how frequent the reporting is. And how fast committed money actually gets put to work, since money sitting idle earns nothing.
One more is how the fund itself is financed. Federal Reserve researchers found banks’ committed lending to private credit vehicles grew from about $8 billion in early 2013 to about $95 billion by late 2024. That bank line lets a fund keep lending. It is also a lender that can demand more collateral at the worst moment. Ask who provides it and what happens if it is pulled.
What does a strong answer sound like?
A strong manager gives you the loan-to-value to your last dollar without looking it up. They show losses after recoveries, year by year, next to the default rate. They walk you through their worst loan, what went wrong and what they got back. And they volunteer the unflattering numbers before you ask.
The same Fed research notes that private credit vehicles are largely unregulated and their filings are generally not public. So what a manager will show you matters more here than in most markets, and the good ones show a lot.
How we think about it
Most credit pitches start with the yield and work down. We start with what sinks a fund and work up, because the yield is a promise and the collateral is a fact.
The best signal we have found is whether a manager can walk you through their worst loan without being asked twice. What went wrong, what they did, what they got back and how long it took. A manager who has worked out a bad loan and will show you the file has told you more than a short, clean record can.
Where this does not apply
This framework is built for loans backed by real property. It fits poorly on loans against a company’s cash flow, where the collateral question looks different. It does not fit venture debt, where the real security is the next funding round. And it is the wrong lens for a fund that earns mainly from origination fees, where the question is whether lending standards hold up when volume pressure rises.
Related questions
What is a good loan-to-value?
Lower means more cushion. Measure it to the last dollar of your loan, not just the senior lender’s. Above 100% means the collateral does not cover the debt.
Why do default rates mislead?
A default is an event. A loss is an outcome. A fund can see 10% of its loans default and lose almost nothing if recoveries are strong, or see 2% default and lose a lot if they are not.
How long a record is enough?
Long enough to include a stretch when credit got tight. A few easy years do not prove much, so also look at what the manager did before this fund.
Does insurance remove the risk?
No. It shifts who takes the first loss, which helps, but it adds the insurer as a risk and usually costs yield. Ask what is covered and what is not.
Does Ocean Ridge offer a private credit investment?
We plan to open an income product in early 2027. It goes through this same screen. Its terms will be in its own offering documents.
If you are weighing a deal this year, book an investor strategy call.
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