Capital preservation is not a passive strategy. It is not what happens when you avoid doing anything risky. It is the result of active decisions at every stage of the lending process, decisions about markets, about assets, about borrowers, and about structure. I want to walk through how we think about it at GMI Capital, because I think it is genuinely different from how most lenders approach the question.

Rule number one

Rule number one at GMI Capital is do not lose the money. Ours and yours. Every other rule exists to make that possible.

I say ours and yours deliberately. I have $4 million of my own capital invested alongside our LPs in the current fund. When I talk about capital preservation I am not talking abstractly about investor money. I am talking about money I cannot afford to lose either. That alignment changes how you think about every loan decision.

The best capital preservation strategy is not a risk management framework. It is not wanting to lose the money.

Where preservation starts: the market

Capital preservation begins before we ever look at a specific asset or borrower. It begins with the market.

We lend in markets with real population growth, rising real estate demand, and natural barriers to new supply. Why does this matter for capital preservation? Because in a downside scenario, a borrower default, a market correction, or a forced sale, the value of the underlying asset is what stands between our investors and a loss. Assets in markets with strong fundamentals hold their value better and sell faster than assets in markets with flat or declining demand.

A first lien loan at 60% LTV in Las Vegas is a fundamentally different risk profile than a first lien loan at 60% LTV in a secondary market with declining population and rising vacancy rates. The LTV looks identical. The preservation of capital in a downside scenario is not.

The underwriting standard that matters most

We have nine lending principles at GMI Capital. The most important one is this: we only lend on assets we would be comfortable owning at our loan basis, including estimated foreclosure costs.

That standard sounds simple. In practice it eliminates a significant percentage of deals that would otherwise pass a standard underwriting review. If the asset is in a location we would not want to own, we do not make the loan. If the product type is one we could not operate or sell efficiently in a downside scenario, we do not make the loan. If the zoning or entitlement situation creates uncertainty about the asset’s future value, we do not make the loan.

The question we ask is not “will this loan get repaid?” The question is “if it does not get repaid, would we be comfortable with what we end up owning?” Those are different questions, and the second one is much more demanding.

LTV as the insurance policy

Our blended LTV across the track record is 45.4%. That means the underlying assets would need to lose more than half their value, on average, before investor principal is at risk. That is not an accident. It is the output of a deliberate underwriting standard applied consistently across three fund generations.

I am aware that 45.4% LTV means we are sometimes leaving yield on the table. A lender willing to go to 75% or 80% LTV can charge more for the loan. We are not interested in that trade. The additional yield does not compensate for the additional risk in a downside scenario, and our investors are not asking us to maximize yield. They are asking us to preserve capital and generate consistent quarterly cash flow. The conservative LTV is how we honor that.

Conservative underwriting is not the absence of ambition. It is a different definition of what we are trying to accomplish.

The borrower question

A great piece of paper does not necessarily mean it is a great loan. This is one of our core principles and I believe it is underappreciated in the lending industry.

We assess the borrower as thoroughly as we assess the asset. Their track record of doing what they say they will do. Their liquidity position beyond the deal. Their experience with this product type in this market. One thing we look at specifically is whether the borrower’s stated net worth is actually accessible, or whether it is sitting in asset protection trusts that would be unavailable in a workout situation. Banks and lenders often overlook this in the interest of getting the loan closed. We do not.

A strong borrower with a mediocre asset is almost always a better loan than a great asset with a borrower you are not sure about. Assets can be taken back. Borrower character cannot be manufactured after the fact.

What preservation looks like in practice

Across 26 loans and three fund generations, we have not had a principal loss. That is not luck. It is the output of the standards I have described above, applied consistently over nine years of lending in growth markets.

The track record also shows something I think is counterintuitive: our IRR has improved with every fund generation while our LTV has stayed flat or tightened. Better returns with more conservative underwriting. That is what happens when you build relationships in markets you know deeply and source deals before they are marketed to competing lenders.

Capital preservation and strong returns are not in tension. Properly executed, they are the same strategy.

Past performance is not indicative of future results. This post reflects the personal views of Francis, Founder and Principal of GMI Capital, and does not constitute investment advice.