Investors in private mortgage funds should make sure that the fund management team has the right experience and competence. The management team plays an important role because the lending guidelines determine the ultimate risk placed upon the capital.




If the fund management is disciplined by following their underwriting guidelines, the fund is likely to prosper and provide a good return to the investors. In fact, the largest risk by investing in private mortgage funds is a poor underwriting system, which can result in a loan-default and the risk of losing the principal.




Savvy investors have a process to interview the fund manager and its investment team. Investors who carefully review the management team before electing to invest in a fund can avoid many of the risks associated with private mortgage funds. To do this review, investors should consider the following questions:






	
Is due diligence performed on all loans originated?


	
Does the fund originate loans or purchase them?


	
What is the maximum LTV (Loan to Value)?


	
LTC (Loan to Cost)?


	
How does the management team assess the value of the collateral?


	
Is the fund leveraged? If yes, what’s the DLF (debt level of the fund) and DLA (debt level by asset)?


	
Asset Class?


	
Loan Types?


	
Does the management team have a track record of quality investments?


	
What percentage of the fund’s loans has defaulted?


	
Assets Under Management (AUM)


	
Foreclosure process 






These questions will give investors critical insight into how effectively the fund’s management team manages risk and will provide a strong indicator of the fund’s future performance. Most Investors focus on the character and resources of the manager and its team and not on past performance.




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