The banking and private lending industry has experienced a busy March, with Silicon Valley Bank and Signature Bank being shut down by the FDIC. This has put pressure on several regional banks, causing the Federal Reserve Board to only increase the expected 50 basis points by 25 basis points. The Federal Reserve aims to move the economy into a recession to control inflation by Q1 2024.

WSJ’s prime rate is now at 8%, which has made the previously good private lending rates of 9% look astounding. It will take an entire year for the interest rate penetration to take effect, and mortgages are still being offered in the 5-6% range. Private lending is giving banking a run for its money, with capital aggregators able to price around 6-7%. This will lead to an uptick in deals closed between Q2 and Q3 of 2023.

The real winners of this recessionary period are balance sheet lenders who have control over funds to lend. It is expected that things will get worse before they get better, and there are two strategies to prepare for Q3, Q4, and Q1 of 2024. The first strategy is diversification of capital if you plan on sticking to origination, and the second is to start a fund now to be ready to deploy when inevitable bargains start showing up.

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