It has been long touted that a good defense is the secret to success for a good offense across a wide array of professional sports. Investing is no different. I learned that early. After founding an investment company out of college and building my career, I have spent years underwriting credit and equity opportunities through the same lens I apply today: understand the downside before the upside, demand compensation for every risk taken, and pressure-test every assumption before committing a dollar.
A credit fund's best quarter and its worst quarter tend to look similar from the outside. The same memos get written. The same committee meetings happen. The same number of deals come across the desk. What separates the two is almost never visible in real time. It shows up years later, in which loans paid back at par and which did not.
If the first two notes in this series described our thesis and our philosophy, this one is about the craft that turns both into something that compounds. Not the deals we do, but the deals we decline. Not the capital we deploy, but the discipline that governs deployment.
The Checklist That Saves You from Yourself
Plenty of successful investors have written at length about the value of checklists. The argument, borrowed partly from Atul Gawande's work in medicine, is that the most dangerous moments in professional life are the ones when an expert, under pressure and in familiar territory, makes a predictable error that a checklist would have caught.
I take this seriously. A great deal of credit investing is similar work repeated under varying pressure, with varying enthusiasm from the borrower or the operator. The failure mode is rarely dramatic incompetence. It is the quiet skipping of a step because the deal "feels right," or because we have worked with this sponsor before, or because the committee meeting is tomorrow morning. Those are the errors that bankrupt credit funds.
Our underwriting process is therefore procedural. A deal moves forward only when a specific sequence of diligence is completed. Collateral inspection. Third-party appraisal. Title review. Environmental review where applicable. Lien searches. Sponsor background verification. Cash flow modeling under stress scenarios. Documentation review and verification. There are no shortcuts for preferred borrowers and no exceptions for time-sensitive closings.
Some sponsors find this frustrating. The friction is the product. If our process is fast enough to outrun our judgment, it is too fast. Capital deployed well is allocated well by the borrower and grows their business effectively.
At a deeper point, this is about environment design. The best way to make consistently good decisions is not to rely on willpower in the moment but to design the conditions under which decisions get made. An underwriting model is environment design. A committee structure is environment design. An incentive plan that rewards patience is environment design. We have tried to build each of those deliberately, because we know what happens if we do not.
The Mathematics of a Private Credit Portfolio
Imagine a fund that deploys $100 into a portfolio of twenty loans at an average yield of 12%. If every loan performs, the fund generates $12 of gross income per year.
Now imagine a single loan, $5 of principal, defaults and suffers a 40% loss. The loss is $2. That is roughly two months of the entire portfolio's gross income, consumed in a single event, at a default rate that is already low by any historical standard.
The implication is hard to escape. A credit fund cannot return its way out of a credit problem the way an equity fund can. One home run does not balance out several strikeouts, because there are no home runs in credit. The upside on each loan is capped. The only reliable path to mid-teens in this asset class is to make loans that do not lose money, and everything else follows from that.
What Patience Actually Looks Like
Nick Sleep, managing partner of Nomad Partners, spent a great deal of time on what he called destination analysis. The practice was to ask where a business or a strategy was headed twenty years out, and whether that destination was worth the waiting. Credit investing has its own version of that question, and it is austere. We are headed to par, plus interest. The destination is fixed.
Sleep's other contribution, the one I think about more often, was his insistence that the right business model for an asset manager was one that treated investors as partners in the quality of decisions over long horizons, rather than as customers paying for short-term outputs. He lived that view by returning capital when the opportunity set shrank and by refusing to scale beyond what his strategy could support.
That conviction is why I joined Beckett Industries. In a credit market that rewarded AUM growth above generating returns for their investors, Danny Beckett Jr., Clarence Rivette, and I designed the launch of the ABF Fund I around the opposite instinct. We sized it at roughly $50M in LP equity; not a ceiling which could not be pushed through, but the upper bound of what our lower middle market, asset-backed strategy can actually support without diluting the underwriting discipline that defines it today. If the destination in credit is fixed at par plus interest, then the manager's honest job is to choose collateral and counterparties carefully, size to what the opportunity genuinely supports, and treat each LP as a co-owner of those assets and decisions surrounding them rather than a customer buying short-term yield. That is the firm I wanted to help build. It is also the one I joined to help lead.
What We Are Asking of Ourselves
It is not especially difficult to underwrite one good loan. A careful, diligent person can do it. The difficult thing is to underwrite thousands of loans consistently well over decades, across a team, through multiple cycles, in the presence of commercial pressure, relationship pressure, and the slow corrosion of judgment that comes from watching other lenders do worse deals and apparently get away with it.
We are trying to build a team whose character does not bend under that pressure. Our criteria are biased toward humility and curiosity. Our incentive structure rewards careful loss-avoidance alongside careful deployment. Our committee structure ensures that every voice can, and sometimes must, decline a transaction without being overridden by the enthusiasm or the momentum of a pipeline.
Our reputation is built by the loans we do not make as much as by the ones we do, and that reputation compounds slowly. I intend to be here in forty years, still declining most of the deals that come across my desk, still serving operators who value a patient counterparty, and still writing notes like this one to investors who have trusted us with their capital for the long run.
This opportunity to service you patiently is my blessing.
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Private Credit Disclosures. Private credit investments are illiquid and involve risks including credit, interest rate, and counterparty risk. This material does not constitute investment advice. Performance figures are unaudited unless otherwise indicated. Available to qualified purchasers only.