Non-Bank Lenders Come in Two Varieties
Originally published on LinkedIn in Jan Brzeski’s Observations newsletter. Republished here with permission.
In my last Observation, I covered aggressive — and in some cases irresponsible — lending practices creeping into parts of the real estate market. In this article and the next, I'll cover two related topics: first, the structural differences between the two main types of non-bank lenders, and why those differences matter to borrowers; and second, how lenders fail.
Two models, two different goals
When a real estate lending entrepreneur starts a new business, one of the first choices is how to structure it. There are two main options: 1. the investment manager model (also called a fund) 2. an operating company — an "OpCo." They attract different founders with different goals, and the structural gap between them is wider than it looks from the outside.
The investment manager/fund model
In the investment manager/fund model, the goal is to aggregate capital from investors and put it to work. Growth is organic and slow: a larger balance sheet requires more capital, which requires continuous fundraising. With loan rates frequently under 10%, investor returns tend to land in the high single digits — enough for conservative investors, but not enough for anyone chasing big returns.
That creates a marketing problem. Conservative investors tend to prefer brand-name firms. If they can earn 9% from Blackstone or AllianceBernstein, a small local lender with a similar track record and similar targets has to work hard to compete.
The founder who thrives in this model is someone who genuinely loves the craft — finding and underwriting loans, building a pristine track record over years. Think of a classic car restorer who cares more about the quality of the work than how much money he or she makes, or how long it takes. Patient, detail-obsessed, not in a hurry.
Most early-stage investment managers raise capital through an open-ended fund, meaning investors can enter and exit at regular intervals rather than committing to a fixed 5- or 10-year period.
The OpCo model
The OpCo founder is playing a different game entirely. The goal is enterprise value — building a business worth selling. Investors are targeting an equity multiple: put in $1 million, sell the business a few years later, walk away with $5 million.
The path to that multiple runs through origination volume. Here's how the math works: suppose a lender raises $10 million in equity and secures a $30 million credit line, for a $40 million balance sheet. How much can they originate? The answer — surprising to outsiders — is roughly $500 million per year. They do it by filling their balance sheet with loans each month and selling those loans to other investment managers. $40 million times 12 months = $480 million per year.
A business with that origination volume might generate $8 million-$10 million per year in revenue. With good margins, it can quickly be worth a multiple of the $10 million required to start it.
By contrast, a fund with the same $10 million in equity — matched by a bank line of credit — has a $20 million balance sheet. Assuming loans turn over annually, it originates roughly $20 million per year. Same starting capital, 24 times less volume. The staffing difference matches: the fund might run with a handful of professionals; the OpCo needs dozens.
OpCo businesses are also typically structured as corporations rather than funds, which suits equity-based executive incentives and a planned exit.
What this means for borrowers
Neither model is inherently better. But the incentives diverge in ways worth understanding. The fund manager is building a reputation over decades — bad loans are impossible to hide, and one messy credit cycle can end the business. The OpCo founder is building toward a sale, which can mean slightly less obsession over loan quality at the margin.
That said, plenty of fund managers aren't good fiduciaries, and plenty of OpCos are run with care. The model sets the incentives; the people determine the outcome.
In my next article, I will continue this discussion covering the main ways that private lenders can stumble and disappear. Subscribe to get notified of the next article.