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Private credit has grown as an alternative source of capital as banks step back from commercial real estate lending due to regulatory pressures and risk aversion. For investors, this shift opens the door to stable, asset-backed returns in a market previously dominated by institutional allocators.
The private credit market isn’t slowing down. McKinsey research shows the sector has grown ten times larger since 2009, and projects it to to double in size over the next five years. At the same time, Moody’s notes that private credit investors are expanding beyond direct lending into asset-backed finance and real estate.
This change benefits both borrowers who need capital and investors looking for yield. As traditional banks face tighter regulations, private lenders fill the gap with faster decisions and more flexible terms. At the same time, investments in private credit funds mean those funds have more liquidity to offer to borrowers.
Start by deciding how much risk you want. Most CRE private credit can deliver 8%-12% yields, depending on the loan type, asset quality and location.
Two common structures include:
When assessing a private credit fund investment, be sure to examine factors including loan-to-value (LTV) ratios, debt service coverage and borrower quality. These indicators help reveal the underlying risk of the portfolio.
Researching how the manager performed in both bullish and bearish markets offers key insights. Did they take maximize gains during growth phases? During recessionary times, did they avoid major defaults? If not, what were their actions when loans went bad?
Good managers not only know finance, but have hands-on experience in real estate. Their ability to assess asset viability, location fundamentals and market dynamics can make a material difference in outcomes. They understand what makes properties succeed or fail because they’ve worked with buildings and markets, not just spreadsheets.
Ask them to share their track record through various market cycles as well as their experiences with different asset types (e.g., hospitality, multi-use CRE) and geographic location fundamentals.
Strong managers are selective. They reject more deals than they accept because they stick to strict standards. Rigorous underwriting standards, on-site property inspections and deep knowledge of local markets are necessary in building a strong portfolio. They won’t chase deals just to grow their portfolio size.
Ask private credit managers how many potential deals do they decline for everyone they fund, and why?
A well-diversified portfolio reduces exposure to any single sector or geographic risk. Whether a manager focuses on one property type (like multi-family or industrial) or spans multiple sectors, the key is alignment with your investment goals.
Understand how many loans make up the portfolio, which property types are included, geographic dispersion, as well as exposure to properties under development versus stabilized properties. Some managers specialize in apartments or warehouses; others invest across many sectors. Either approach works if it aligns with your income goals..
See which borrowers get funded, which properties they target, and how deals get structured. Some funds prefer stable properties with existing tenants. Others look for buildings that need improvements or repositioning.
Also consider how returns are structured-how do you get paid? Will you receive quarterly distributions? Annual payments? Or will returns compound until the portfolio ends? Knowing when and how you’ll receive your income as well as return of capital is essential for financial planning.
The right private credit manager makes all the difference when it comes to your income and financial goals. The manager should offer transparency, sound judgment and a track record of capital preservation and yield delivery.
If you’re looking for returns based on loans supporting quality commercial real estate deals, consider private credit managers like AVANA Capital. Our team brings deep expertise along with hands-on experience across hospitality, multifamily, industrial, self-storage and retail anchor properties, creating financing that protects your capital while delivering consistent income.
For information on AVANA’s investment opportunities, visit our website www.avanacompanies.com or contact Cathy Ellsworth, EVP-Investors Relations (cathy.ellsworth@avanacompanies.com / 602-357-0497).