How to effectively navigate private lending

In a constantly evolving lending market, it can be hard for brokers to keep up with the range of options available for their commercial and residential customers.

Traditional lending avenues, aka the big banks, remain the standard bearers of financial services, but their strict lending criteria, coupled with increasingly complex borrower scenarios, make the private lending sphere equally as important.

Once viewed as a wild west due to lower regulations and the existence of, shall we say, less-reputable lenders, private lending has evolved into a powerful alternative for brokers seeking flexible, fast, and tailored solutions for their clients.

With post-election dust beginning to settle, now is a good time to catch up on what private lending really offers – and how to navigate it effectively.

Where private lending fits

While the term ‘private lending’ has historically implied funding by high-net-worth individuals and family offices, the term has increasingly become synonymous with non-bank lending, which incorporates large-scale, institutional warehouse facilities.

Most private lenders, non-bank lenders employ a mix of capital. Institutional funding can be deployed at the loan-origination phase before being packaged and sold to investors, for instance.

Jason Lucas (pictured), head of sales, commercial lending at Assetline, explained: “For investor-backed deals, there’s more flexibility because it’s the investor’s choice. Institutional funding is black and white – you either fit the policy or you don’t. With both models, we have more ways to make a deal work.”

He outlined three main streams of credit:

• a family office or high-net-worth individual lending their own capital
• an investment platform or pooled fund deployed deal by deal
• institutional capital – usually a warehouse facility from a major global bank

“Why go private versus a bank? Generally, the banks have got a lot of rigmarole: process, timing delays, hurdles,” said Lucas. “The path of least resistance is usually with a private lender because it's direct to a credit committee, straight to the source of capital – investors or institutional funds. It allows you to get the solution quicker, faster, and simpler.”

Generally, institutionally backed loans have a lower cost of capital, so rates are cheaper, while private or investor-backed loans tend to have higher rates, because investors want higher returns.

“But to the borrower, there’s no practical difference in how the loan is delivered – it’s the same structure,” said Lucas.

Moving past the cowboy period

Lucas explained that brokers need to know a private lender’s funding structure because they need to know the lender can fulfil its obligations. For example: “If a lender has no balance sheet and raises money deal-by-deal, the investor might pull out, or not provide capital in time. That’s a risk.”

He pointed how foundational investment firms like Babcock & Brown’s influenced more private lenders to provide cash – secured or unsecured – with increasingly easier terms than the Big Four.

As Babcock & Brown went into liquidation following the Global Financial Crisis, the public perception of private lending similarly collapsed.

“In an unregulated space, by nature of the fact that it’s unregulated, it lets opportunistic people did things they shouldn’t – putting out term sheets out there without the ability to fulfil, charging exorbitant fees and not fulfilling on what they’re saying they’re going to do” recalled Lucas.

However, as the private lending space has scaled, trust has returned. Most reputable private lenders are also on broker aggregation panels, which requires rigorous testing and vetting.

Being on the major aggregation panels should therefore instil a degree of trust, in Lucas’ view. Other markers of trust that brokers should sniff out include:

• Testimonials
• References
• Track history (i.e. how long the fund has been around for)
• Size of balance sheet (which demonstrates the lender’s ability to fund)
• Demonstrable proof of settlements

Lucas recommended talking with an aggregator to get the lowdown on any alternative lender you’re considering writing loans with. Unfortunately there is no Trust Advisor for private lenders, making word of mouth an integral research tool.

While company websites can be a good starting point, they’re not always factually accurate.

Working with private lenders

Brokers need to understand the private lenders’ point of view in order to write with them. According to Lucas, the Holy Trinity of a good deal comprises:

• security
• purpose
• exit strategy

“It’s those three points being aligned,” said Lucas of a good deal. “Are we comfortable that the security makes sense from a valuation perspective? And if we had to step in and sell it, does it make sense from a liquidity perspective?”

Macroeconomic factors play deeply into the liquidity piece. As Lucas said: “If there’s no liquidity in the market, it’s a risky loan.”

Assetline and its contemporaries will assess the likelihood of getting their security back, while also making sure the purpose of the loan is legitimate and above board.

The quality of submission, whether physical or digital, also goes a long way to getting the deal over the line. It is here where a lender often steps in to provide education to the broker.

For Assetline’s part, it touts a national team that does one-on-ones, coaching, and mentoring. The group also runs monthly accreditation sessions covering all product classes.

As for how a broker forge deeper ties with their private lender? Buying their relationship manager a cup of coffee is a good place to start, said Lucas. “The relationship is built face-to-face, the education piece is built by working on case examples.”