“Rule number one: never lose money.
Rule number two: never forget rule number one.”
— Warren Buffett
If you’ve been investing the last few years and felt frustrated, you’re not alone.
A lot of investors have been sitting in equity positions, especially in real estate.
That can mean higher upside, but it also means a lot more risk.
And lately, that risk has become very real.
That’s why debt funds and private credit have exploded in popularity.
People are realizing they don’t always need to swing for the fences to win.
Sometimes, playing defense is how you stay in the game long term.
Today, I want to walk you through how debt funds actually work, why senior debt matters, and why this space has become so attractive right now.
Let’s jump in.
1. Not All Debt Funds Are Created Equal
When people hear “debt fund,” they often assume all of them are basically the same.
They’re not.
Just like equity deals, there’s a huge range in quality, structure, and risk.The biggest distinction is where the fund sits in the capital stack.
At the very top of the stack is senior debt.
That’s the lowest-risk position in any deal.
Below that, you’ll often see mezzanine debt or second-position notes.
Those are much riskier.
A good way to think about this is your own home.
When you buy a house, you might put 10% down.
If you stop paying the mortgage, the bank takes the house.
The bank doesn’t negotiate with the equity owner.
They foreclose.
Senior debt works the same way in commercial real estate.
If a borrower defaults, the senior lender takes control of the asset.
That’s why first-position debt is so powerful.
A lot of mezzanine or second-position debt funds don’t have that protection.
They rely on everything going right.
Senior debt assumes something might go wrong and structures around it.
That’s a big difference.
2. Why First-Position Senior Debt Is So Attractive
In our world, we work with an established lender that’s been doing this for over 25 years.
They originate short-term bridge loans on small commercial real estate deals.
Think retail centers, warehouses, or small strip malls.
Here’s how a typical deal looks.
A buyer might bring in $2 million of their own money.
Our investors bring in another $2 million as senior debt.
The loan closes at roughly a 50% loan-to-value ratio.
That means there’s a huge equity cushion.
If the borrower performs, you get paid steady interest.
If they don’t, the fund takes over an asset at half of its value.
Over 25 years, there have been very few problem loans.
And even when issues came up, outcomes were usually breakeven or mildly positive.
That’s because underwriting and structure matter more than hype.
Another key advantage is diversification.
This isn’t private lending where all your money sits in one loan.
A debt fund spreads capital across many loans.
That diversification dramatically reduces risk.
Even if one loan struggles, it rarely impacts the overall fund.This is one of the biggest reasons institutional capital loves private credit.
3. Cash Flow Wins More Than People Admit
I talk to investors all the time who debate cash flow versus appreciation.
Here’s my honest take.
Cash flow wins.
Every single time.
Cash flow pays your bills.
Cash flow reduces your risk as you get your capital back over time.
Cash flow gives you flexibility and peace of mind.
I know investors with net worths under $1 million who love debt funds because the income changes their life.
I also know someone worth over $500 million who still prioritizes private lending and debt funds.
Why?
Because cash flow funds lifestyle and opportunity.
Appreciation is great, but it’s theoretical until you exit.
Cash flow is real today.
And right now, debt funds are offering returns in the 9% to 14% range, depending on structure and duration.
A few years ago, those numbers were typical for equity deals.
Now, you can get them in senior debt with significantly less risk.
That shift alone should make investors pay attention.
4. Understanding Risk the Right Way
No investment is risk-free.
Even cash in the bank has risk.
I like to think about risk on a scale from one to ten.
A one might be treasuries or insured bank deposits.
A ten might be early-stage venture capital.
Most real estate equity deals fall somewhere between a three and a five.
They’re not reckless, but they’re not conservative either.
A well-run, first-position senior debt fund sits closer to a two.
That’s because it’s asset-backed.
There’s real collateral.
There’s conservative leverage.
And there’s a legal position that protects capital.
If a borrower stops paying, the fund doesn’t panic.
They execute.
They take control of the asset.
That’s exactly why banks lend the way they do.
They want collateral first.
Private credit simply follows that same logic, often with better yields.
The biggest risk in debt funds usually comes down to underwriting.
If values are wildly overstated, problems can happen.
That’s why experience and discipline matter so much in fund management.
5. Why Everyone Suddenly Wants to Be the Bank
There’s been an explosion in lending over the last few years.
And it’s not an accident.
Traditional banks have pulled back.
Regulations have tightened.
Capital still needs to flow.
Private credit has stepped in to fill that gap.
Investors like it because the returns are strong and predictable.
Borrowers like it because it’s faster and more flexible than banks.
And fund managers like it because it creates a win-win structure when done right.
This is why private credit has become one of the fastest-growing asset classes in the world.
It’s not flashy.
It’s not exciting at cocktail parties.
But it works.
And in uncertain markets, boring often wins.
What This Means for Your Portfolio
Debt funds aren’t about replacing everything else you invest in.
They’re about balance.
They’re about creating a stable foundation.
They’re about lowering volatility while still earning strong returns.
We’ve seen investors allocate meaningful portions of their portfolios to senior debt once they understand it.
Not because it’s trendy.
But because it makes sense.
If you haven’t explored private credit or debt funds yet, it’s worth serious consideration.
Especially in markets where equity risk feels elevated.
We’d love to hear from you.
Have you invested in debt funds or private credit before?
What’s been your experience?
Drop a comment and join the conversation.
Before you go, make sure to check out our special report on inflation investing.
If you’re interested in investing with us, join our investment club and we’ll learn more about your goals.
And don’t forget to check out my bestselling book on Amazon.
Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.
References
Bloomberg. (2024, January 10). What the boom in private credit means for the economy. Bloomberg News.
https://www.bloomberg.com/news/articles/2024-01-10/what-the-boom-in-private-credit-means-for-the-economy
Cooper Pacific. (2020, June). Understanding debt funds.
https://cooperpacific.ca/2020/06/understanding-debt-funds/
DLP Capital. (n.d.). What is a debt fund?
https://dlpcapital.com/articles/what-is-a-debt-fund
Hanlon, S. (2023, April 12). Is the risk-free rate truly risk-free? Forbes.
https://www.forbes.com/sites/seanhanlon-1/2023/04/12/is-the-risk-free-rate-truly-risk-free/
Hill, B. (2023). Fire yourself: Replace your working income with passive income in 3 years or less. Amazon.
https://www.amazon.com/dp/B0CJZY81VJ/
Hill, B. (n.d.). How to use inflation to your advantage. Bronson Equity.
http://www.bronsonequity.com/inflation
Investopedia. (n.d.). Underwriting.
https://www.investopedia.com/terms/u/underwriting.asp
Muir, D. (2024, October 4). Giant banks struggle, but private credit is soaring. Forbes.
https://www.forbes.com/sites/donmuir/2024/10/04/giant-banks-struggle-but-private-credit-is-soaring/
Bronson Equity. (n.d.). Join our investment club.
http://www.bronsonequity.com/join
Cash flow vs. appreciation [Video]. (n.d.). YouTube.
https://www.youtube.com/watch?v=MbvOo2-yLpM&t=80s
Diversification explained [Video]. (n.d.). YouTube.
https://www.youtube.com/watch?v=LrlKMJRJD24
Private credit explained [Video]. (n.d.). YouTube.
https://www.youtube.com/watch?v=frport5ODE8&t=3s
