This article will discuss my perspectives on the private lending industry outlook for 2025, with a primary focus on debt funds.
The Viability of Debt Fund Strategies
Many private lenders have wondered whether the “Debt Fund” strategy will continue to be viable in private lending as the industry becomes more standardized and institutional in nature. With rated and unrated securitizations hitting record numbers, some have argued that the age of the balance sheet lender has come to an end. I beg to differ. Private lending is a massively fragmented market. The industry cannot obtain complete standardization in this segment of the mortgage market because real estate investment real estate is diverse, unique, and hyper local.
Institutional Influence on Debt Funds
As the market has evolved, institutional investors have acknowledged the need for private lenders to raise their own debt funds or other capital strategies because not all loans fit the credit criteria of the institutions. Many lenders continue to use non-conforming underwriting guidelines based on their business judgment.
In fact, as the institutional market continues to rally around securitizations, it is likely we will see a “conforming” and “non-conforming” type arrangement much like we see in conventional mortgage lending. Thereby creating a continued need for private lenders/originators to have the necessary capital to fund those “non-conforming” loan requests. Further, if lenders prefer a local focus and more asset-based credit criteria, discretionary capital becomes essential for executing a direct lending strategy.
Economic Trends Supporting Debt Fund Formation
Finally, economic trends and tax policy will likely foster debt fund formation for some time. Interest rate cuts will continue. This will push investors out of the high interest money market and other fixed income products, and they will search for similar rate opportunities. This is where debt funds and other programs offered by private lenders can shine. Now that the election over, it is highly likely the incoming Trump Administration and the Republican Congress will create a business-friendly environment through tax cuts and deregulation. Specifically, with respect to the 199A Qualified Business Income passthrough deduction, it is highly likely they will seek to extend or make this permanent.
This is highly accretive to balance sheet lenders as it extends significant tax savings to their investors particularly when a Mortgage Real Estate Investment Trust is added to the capital strategy.
Opportunistic Lending and Distressed Debt Strategies
In other segments of private lending – we will see an uptick in opportunistic strategies. Particularly in commercial real estate and multifamily. Headwinds continue to plague that market with heightened defaults and distress. Many private lenders will begin exploring opportunistic lending or distressed debt fund strategies in 2025.
A Bright Future for Debt Funds
For these reasons, I firmly believe that there is a bright future for debt funds in private lending going into 2025. If you’re interested in incorporating a debt fund into your business strategy in 2025, our Corporate & Securities team can guide you through every step of the process. Contact us today to get started.
