Why use the same questions for completely different investments?
Yield can make unrelated investments difficult to compare. A 9% equipment lease, an insurance-linked security, a farmland mortgage, and an insured receivable may all produce similar stated returns while containing entirely different loss mechanics.
The purpose of this framework is not to reduce every opportunity to one score. It is to make sure attractive presentation does not cause us to skip the same fundamental questions. A deal should be understandable in plain language before it becomes complicated in a spreadsheet.
Decision rule: If we cannot clearly identify the return engine, loss-absorption mechanism, cash-control structure, hidden correlations, and enforceable exit, the opportunity is not yet underwritten.
Return Engine: What exactly pays us?
- What specific contract, asset, obligor, insurer, or event produces the cash return?
- Does repayment depend on normal contractual cash flow—or on refinancing, fundraising, or asset-price appreciation?
- What is the expected duration, and what can extend it?
- What historical data demonstrates that this return engine has actually performed?
- What single economic event would most likely interrupt repayment?
Principal Protection: What stands between a problem and a permanent loss?
- What collateral, payment right, insurance, reserve, guarantee, or seniority protects principal?
- Is collateral value based on realistic liquidation value rather than optimistic retail or appraisal value?
- How much borrower, seller, or originator equity sits beneath or alongside our capital?
- Who perfects, verifies, monitors, and enforces the security interest or contractual right?
- What has the historical recovery rate been after defaults, including time and legal costs?
Cash Control & Operations: Who actually controls the money?
- Do borrower or obligor payments flow directly into a controlled account, lockbox, trustee, or independent servicer?
- Can the underlying asset or receivable be independently verified before funding?
- Who services the investment, and what happens if that servicer fails?
- What reporting arrives monthly or quarterly, and can it be reconciled to bank or custodian records?
- What fraud scenarios are possible—double pledging, fake invoices, inflated values, related parties—and which controls specifically prevent them?
Concentration & Correlation: How many different risks do we really own?
- What are the largest borrower, obligor, broker, dealer, insurer, geography, industry, and collateral concentrations?
- Do legally separate positions actually depend on the same economic driver?
- How much of the portfolio depends on one manager, servicer, custodian, bank, or valuation agent?
- What happens to the strategy in recession, inflation, higher rates, a credit freeze, or a major catastrophe?
- What portfolio limit prevents one idiosyncratic failure from materially impairing total capital?
Legal, Liquidity & Exit: Can we enforce it—and can we get out?
- Is the structure legal and enforceable in every relevant jurisdiction, and are required licenses in place?
- What could subordinate, invalidate, delay, or challenge our lien, ownership, assignment, or payment right?
- How much cash is locked, for how long, and are there capital calls or funding obligations?
- Is there a secondary market, refinancing path, scheduled amortization, redemption mechanism, or natural maturity?
- What are the fees, taxes, expenses, and manager incentives—and what is the expected net return after realistic losses and friction?
How to use the framework
For a first review, each answer should fit on one page or in a short data room note. Detailed underwriting comes later. The initial purpose is to expose missing information, misaligned incentives, unsupported assumptions, and concentrations before significant time or legal expense is committed.
Strong opportunities usually become easier to explain as diligence progresses. Weak opportunities often require more narrative to explain why ordinary protections should not apply.
