How non-bank lenders stumble — and sometimes fail
Originally published on LinkedIn in Jan Brzeski’s Observations newsletter. Republished here with permission.
Every lending business runs on two ingredients: capital to lend and borrowers who need financing. When lenders fail, it is because one or both have dried up. Below are some of the leading challenges that trip up non-bank lenders, whether they make loans on real estate or any other type of assets.
Bad loans
One thing I appreciate about investment management is that the score is always on the scoreboard. Every lender eventually takes losses — the question is whether those losses are survivable across a full real estate cycle (typically ten years or more).
A bad track record is like a car that has been through a major crash: impossible to hide, and hard to sell. The single most common reason a lender goes out of business is that investors lose confidence in the leadership team's judgment. Once that confidence is gone, capital stops coming in.
Poor liquidity management
A lender can fail on liquidity even when its loans are performing. The causes are varied: expected payoffs get delayed; a fund faces a wave of redemption requests; origination volume outpaces available capital; a credit line gets called; or a construction lender fails to plan ahead adequately for construction draws.
Fund managers need to plan for a wide range of scenarios. Open-ended funds — frequently preferred by wealth managers for income-oriented funds— make this harder than closed-end structures, because redemption timing is unpredictable. Institutional investors in closed-end funds give managers years of runway; retail-oriented open-ended funds don't.
Inferior returns
Even a well-run fund with a strong track record can wind down if returns fall below what investors can get elsewhere. Capital is patient, but not infinitely so. Returns must be greater than the risk-free rate available from money market funds or Treasury bills, and the margin needs to be enough to justify the extra risk and reduced liquidity.
Poor succession planning
Key-person risk is another quiet threat. Many private lending funds are built around their founders, and an unexpected departure or incapacitation can unsettle investors even if the loan book is healthy. Succession planning — a bench of experienced executives who can execute the same strategy — is the mitigation, but it's more common in larger shops than in smaller ones.
The fear factor
Finally, sector-wide fear can override individual performance. The recent capital flight from corporate private credit is a good example. After years of strong inflows, many open-ended funds are experiencing large redemption requests. Concerns about AI's effect on software-sector borrowers are real, but probably don't fully explain the shift in sentiment — investor psychology tends to overshoot in both directions.
When there aren't enough loans
The mirror problem — not enough loan originations — is less common but worth noting. Without loans, cash builds up, returns fall, and a wind-down eventually follows as the existing portfolio pays off.
A persistent origination drought usually signals one of a few things: uncompetitive pricing; a team that isn't seeing enough deal flow; or a mandate defined so narrowly that the manager can't adapt when the market shifts. Sometimes, though, it's a deliberate choice. A founder nearing retirement, or one who genuinely believes the opportunity set has deteriorated, may decide the right move is to stop making new loans and let the book run off gracefully. That's not failure — it's an orderly exit.
