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Shifting the Paradigm…Again: Capital Strategies in Private Lending

Insights» Upcoming Trends & Changes

February 1, 2021by Kevin S. Kim, Esq.

Read the full February edition of Originate Report here.

2020 tested many private lenders’ capital strategies. Although the private lending industry has very few standardized conventions, capital formation and strategies have been relatively consistent. The three most common capital strategies have always been: (1) balance sheet capital (funds, investor notes, etc.); (2) credit facilities; and (3) correspondence and loan sale.

From my perspective, the biggest lesson the volatility of 2020 taught us was that private lenders needed to have independent, captive capital sources. This was proven by many private lending funds and other balance sheet lenders not only surviving during the spring and summer of 2020 but thriving throughout 2020 and into 2021.

Going into 2021, it is important private lenders do not forget these lessons. While correspondence and institutional capital markets are an important facet to a larger capital strategy, it should not be the only tool in your toolkit. The rationale is simple, CONTROL. A well-balanced, thoughtful capital strategy ensures that the private lender has reliable, captive capital sources along with institutional capital markets plugged in as an added benefit or resource. This balanced approach not only provides liquidity and additional capital, but it grants the operator a significant level of control over their business’ direction. Our recommendation is a balanced structure utilizing a mortgage fund with additional liquidity solutions sourced from secondary capital markets. In a bull market, this provides additional liquidity increasing origination velocity and fee income. In a bear market, it enhances the ability to preserve capital (assuming sufficient reserves are in place) and pivot into different investment strategies all while retaining control over key business decisions.

These same concerns have private lenders searching for new ways and solutions for liquidity and yield enhancement. One hallmark for yield enhancement is using leverage. Banks continue to make credit facilities available for qualified lenders at very attractive rates. One key requirement for the most attractive credit facilities is a sizeable balance sheet of loans. Typically, in the form of a fund.

Other strategies are emerging as well. We have seen a marked increase in securitizations offering liquidity to private lenders across the US. Lately, unrated securitizations have seen an increase in popularity allowing many more private lenders an opportunity to access increased liquidity and yield enhancement via the revolvers made through the securitization. One key consideration when pursuing this is to ensure you have uniformity and standardization to the loans being securitized. Loan type, LTV, terms of the loans, and even loan documentation should be standardized. Another important aspect when pursuing a securitization is to ensure you have the right partners in place to ensure all aspects of the securitization are a success.

We hope that private lenders remember the “stress tests” of 2020 and thrive with the lessons learned. There is still significant opportunity, and it will be the companies that are prepared for a correction that will not only weather the storm but thrive during it. For the private lenders who would like to work on building this blueprint, please do not hesitate to contact us at

Kevin S. Kim, Esq., is a partner in the Corporate and Securities practice at Geraci LLP. Kevin focuses his practice on private placements and other alternative investments for private lenders, real estate developers, and other real estate entrepreneurs. He has advised and prepared hundreds of securities offerings including mortgage funds, structured debt offerings, real estate syndications, crowdfunding offerings, EB-5, and Qualified Opportunity Funds. Kevin is also the lead instructor for the American Association of Private Lender’s Certified Fund Manager Courses, teaching hundreds of mortgage fund managers throughout the United States about securities regulations, fund design, and compliance.  

Read the full February edition of Originate Report here.