The rate cycle that began in March 2022 reshaped the private lending market more dramatically than any comparable period in the last two decades. Understanding what changed — and what it means for borrowers seeking capital outside the conventional banking system — requires stepping back and looking at the structural shifts, not just the rate movements.
Where private lending was before the cycle
From 2010 through early 2022, private lending operated in an environment of historically low base rates and abundant institutional capital seeking yield. Private lenders — family offices, debt funds, specialty finance companies — competed aggressively for quality deals, driving spreads tighter and underwriting standards looser. Borrowers with solid deal fundamentals could often choose between multiple private lenders at competitive terms.
The low-rate environment also meant that the spread between conventional bank debt and private lending was at historically narrow levels. A borrower who could not qualify for bank financing might pay 300 to 400 basis points more for private capital. Significant, but manageable against the return profile of most commercial real estate and business deals.
When rates are near zero, the cost of inefficiency is invisible. When rates are at 5%, it becomes the most important number in the deal.
What the rate cycle changed
The spread widened, then compressed differently
As the Federal Reserve raised rates from near-zero to over 5% in roughly 18 months, the private lending market went through a rapid repricing. Initial private lending rates moved up aggressively — many borrowers saw quotes jump 200 to 400 basis points in a matter of months. But the repricing was not uniform. Lenders with lower cost of capital (family offices, some debt funds with long-dated commitments) maintained more competitive pricing. Lenders dependent on credit facilities and warehouse lines saw their own cost of capital rise and passed those costs directly to borrowers.
Conventional banking pulled back first
The regional banking stress that became visible in early 2023 — Silicon Valley Bank, Signature Bank, First Republic — was both a symptom and an accelerant. Regional banks, which had been significant providers of commercial real estate and business credit, pulled back dramatically. Credit standards tightened. Loan-to-value ratios dropped. Previously bankable deals became unbankable overnight, not because the underlying fundamentals changed, but because the lending environment changed around them.
This pullback created a significant volume of demand for private capital — borrowers who had historically relied on bank relationships suddenly needed alternatives. Private lenders absorbed much of this demand, which had mixed effects: deal flow increased substantially, but so did the leverage lenders had in pricing and structuring.
Debt service coverage became the critical metric
In the low-rate environment, many deals that penciled at 3% interest did not pencil at 7%. Debt service coverage ratios that had been comfortable became razor-thin. Private lenders who had underwritten to conservative coverage ratios found their portfolios performing; those who had stretched on coverage found growing stress. The result was that post-cycle underwriting became significantly more focused on current cash flow and coverage, with less credit given to projected appreciation or future NOI growth.
What the market looks like now
Capital is available but priced for the environment
Private capital did not disappear. In many ways the market for private lending is deeper and more institutionalized than it has ever been. Debt funds raised record amounts of capital in 2021 and 2022 anticipating exactly the dislocation that has occurred, and that capital needs to be deployed. But pricing reflects the current cost of capital and the risk environment — borrowers who are comparing today's private lending rates to the rates they saw in 2020 or 2021 are making an unfair comparison.
Structure has become as important as rate
In the current environment, the structure of a private loan — recourse, coverage requirements, reserve requirements, prepayment flexibility, extension provisions — is often more important to the outcome of a deal than the stated interest rate. A loan at 11% with two extension options and a funded interest reserve may be far preferable to a loan at 9.5% that matures without extension options and requires full debt service from day one.
Relationship quality matters more
Private lenders with long, established relationships are behaving better with their borrowers than lenders who entered the market opportunistically. When deals stress — and some will in this environment — lender behavior during workout situations is enormously consequential. Borrowers who treated lender relationships transactionally during the good years are now discovering the value of those relationships (or the cost of not having them).
What borrowers need to understand heading into the next 18 months
Rate easing does not mean immediate return to pre-cycle conditions
Even as rates ease from their peak, private lending spreads are unlikely to compress back to pre-2022 levels in the near term. Institutional capital has repriced its return expectations, regional bank lending has not fully recovered, and underwriting standards have reset to a more conservative baseline that is likely to persist. Borrowers who are waiting for the 2020 lending environment to return will wait for a long time.
Deals that were marginal are still marginal
The rate cycle exposed deals that were only viable in a low-rate environment. Those deals have not become viable again simply because rates have stabilized. Borrowers and lenders who underwrite to current debt service at current rates — rather than projected future rates — will make better decisions. The discipline the rate cycle imposed should be maintained even as rates moderate.
Access to multiple lenders is now a competitive advantage
With bank lending constrained and private lending more differentiated by lender than it has ever been, having access to multiple capital sources — rather than relying on a single lender relationship — is materially more valuable than it was five years ago. The delta between the best execution and an average execution can be 150 to 250 basis points in today's market. That difference, on a $5 million loan, is meaningful.
CAPITICS works with private lenders across the risk and return spectrum. If you are evaluating a transaction that requires private capital, reach out — we can provide current market context and competitive execution.