Non-Bank Lenders Step Into the Limelight Once Again

The private credit market is booming once more 

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Even prior to the regional banking crisis of March 2023, the U.S. banking system was already experiencing a tightening of credit.

The steady roar of inflation had combined with multiple Federal Reserve interest rate hikes in just 11 short months to stymie real estate development projects and create a capital markets environment that made both loans and liquidity increasingly hard to come by.

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But once Silvergate Bank, Silicon Valley Bank and Signature Bank all collapsed within a six-day period in the middle of March, the banking system suddenly seemed more insecure than at any time in the recent past. So, in an era where a run on deposits is only a couple of clicks away, traditional lending from commercial bank institutions no longer seems to make as much sense, especially to large investors.

In fact, the most desired landing pad for investment capital now and into the future might be with an alternative lender.

“It’s kind of a perfect environment for us and why we built the company,” said Justin Kennedy, founding partner of 3650 REIT, a national lender of permanent capital, bridge loans and transitional financing.

“Really, to be a lender, you can’t really be reactive,” Kennedy continued. “You have to have planned ahead of time and asked yourself: What is the strategy? How am I going to manage these assets? And how will I look out into markets where these assets exist and determine their competitive stature in each of these local markets?” 

Last year, 3650 REIT notched $1.3 billion in originations, and has serviced $13.6 billion worth of loans since its founding in 2016.

Mesa West Capital, an alternative lender headquartered in Los Angeles, has delivered $26 billion in loan commitments since opening its doors in 2004. Raphael Fishbach, one of the firm’s seven principals, said the alternative lending space is an offspring of the Global Financial Crisis (GFC) 15 years ago that saw credit conditions shrivel to the point that a new species of private lenders had to come into existence out of sheer economic necessity.

“That type of pullback with traditional lenders has been ongoing since coming out of the GFC,” Fishbach explained. “So our brand, what we’ve created, has been to effectively replace and become the alternative for when those deals would’ve gotten done in the [traditional] banking world.”

The fallout from this most recent regional banking crisis could spawn the creation of even more alternative lenders in the years ahead, according to some experts. 

An executive director at a top U.S. investment bank, who did not want to be identified, said that the credit and liquidity issue that impacted the failures at Silicon Valley Bank and Signature Bank will ripple through the market and ultimately lead to a “big pullback” in lending activity by most banks, and that both the securitization market and the emergence of debt funds, or non-bank lenders, will be a “vastly important” issue going forward.

The executive director added, however, that traditional investment banks are more than prepared for the continued emergence of the debt funds. 

“They’re both competitors and clients, and it’s our job in working with them to figure out a good balance,” the executive said. “The bigger story is that the pullback in banks will create a tremendous amount of opportunity for the private funds, the debt funds, the non-bank lenders and the securitization market.”

“But there will be enough activity to go around for both markets to function well,” he added. “And there will be a little bit of crossover and competition. And that’s OK, that’s good for the economy.”