As featured in Forbes.
Is your private credit investment portfolio ready for a potential financial collapse?
Some trusted voices in the real estate lending space are speculating a Great Financial Crisis, one like the American subprime mortgage collapse we experienced nearly 20 years ago.
Naturally, people are nervous when considering what that collapse looked like for investors: frozen liquidity, forced markdowns and the inability to exit a loan at all. At the time, the conversation around private credit focused on Blockbuster’s demise into irrelevance and Netflix’s successful pivot to innovate and meet market changes; now, we must consider AI’s potential disruption in the SaaS software space.
Private credit has boomed over the last several years, inspiring fear in those who don’t yet know much about this form of financing from non-bank lenders. Private credit extends loans against a variety of assets, from hard, tangible items like real estate, aircraft and machinery to intangibles like accounts receivable or pools of auto or consumer loans.
Some write off private credit as entirely too risky to take part in, but I recommend weighing the distinctions between single-family loans and large private credit deals to empower you to choose potential impacts—during both the good times and the bad—depending on your comfort level.
Comparing Single-Family Loans And Large Private Credit Deals
It’s important to understand that not all private credit behaves the same under stress. Two common private credit investment models—single-family loans and large private credit deals—can produce very different outcomes depending on factors like buyer base, loan size and loan duration (or loan terms).
Loan Buyers
Single-family loans, or loans backed by individual residences, are typically borrowed by individual homebuyers, fix-and-flip investors, small landlords and local or regional lenders. This creates a broad and diverse secondary market, creating thousands of potential exit buyers per asset.
Large private credit deals, or loans backed by buildings featuring multiple units, are usually purchased by institutional funds, REITs and pension capital companies. In contrast to single-family loans, large private credit deals often lead to a smaller, less dynamic buyer pool.
Loan Size
In single-family deals, loans typically range from $500,000 to $2 million per asset. These assets can be sold individually or pooled to manage credit risk and securitized for diversification of portfolios for investors.
In large private credit deals, amounts range between $20 million and $500 million, traditionally. These loans are syndicated, or customized to meet the needs of specific borrowers with bespoke credit agreements, and require institutional approval processes.
Loan Duration
Single-family loans last between six and 24 months, featuring frequent repayment cycles. This naturally creates turnover in capital.
Large private credit deals require buyer involvement for three to seven years in routine situations and lock up capital until a refinance, sale or similar event.
Loan Factors Determining Liquidity
Liquidity is how quickly an asset can be converted into cash without significant loss of value.
Single-family loans offer a liquid real estate class, as the more buyers there are for a loan asset, the faster you can convert that asset into cash without losing value. With smaller loan amounts, single-family loans can be traded faster and refinanced quickly. Lastly, short loan terms create structural liquidity that larger private credit deals generally do not have.
Large private credit deals move slower and are valued cyclically. Cyclical markets require calculated timing, while markets like residential real estate tend to recover faster due to broader demand—protecting single-family buyers from illiquidity.
That said, these models exist for different purposes. Some investors choose large deals, as they are okay with risking institutional stability for possible higher financial yields. Risk in private credit is, at least in part, linked to the concept of leverage. Simply put, the more leverage, or reliance on borrowed capital to increase investment capacity, the more potential downside when markets shift and change.
The right fit depends on risk tolerance, return expectations and liquidity needs.
Investment Checklist
When considering any private credit investment, ask yourself these questions to minimize risk in the event of an economic downturn:
- How quickly can this asset be sold?
- How many buyers exist for it?
- How long would my capital be locked up?
- What market or sector risks could affect performance?
For instance, consider a $900,000 fix-and-flip loan on a single-family home originated in January. If market conditions softened by June, buyer demand slowed and home prices dipped, investors could face a range of outcomes depending on local demand, financing conditions and timing.
The asset could be repriced to attract buyers and support a quicker sale. Refinancing into a rental loan could provide an alternative strategy. Market weakness or tighter lending standards could limit refinancing or repositioning options. Holding periods could extend if pricing, financing or buyer demand deteriorate.
Alternatively, take a $150 million loan on an office building originated in a similar period, with market conditions shifting one to two years after origination.
Buyer pools could narrow, with some purchasers seeking discounted pricing. Any sale could require complex approvals and negotiations. Depending on asset quality and sponsorship, restructuring or additional capital sources might still be available. Longer investment horizons may allow some sponsors to hold through market cycles rather than sell immediately.
In both scenarios, the underlying asset exists, but outcomes are significantly influenced by liquidity. When markets shift, the ability to move capital efficiently can matter as much as the quality of the underlying investment.
Conclusion
In private credit, performance isn’t only about asset quality—it’s about whether the market allows you to exit when it matters most.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
