Private Lending in Uncertain Times
by Jon Hornik, Esq.
In 1977, a soon‑to‑be-classic film hit theaters and sent chills through beachgoers everywhere. Much like the infamous shark in “Jaws,” which lurked beneath the surface and made every dip in the ocean a nerve‑racking gamble, today’s financial markets are prompting investors to wonder: Is it safe to wade back in?
In “Jaws,” the great white’s reign of terror left the townspeople terrified to return to the water. Similarly, the global finance community recoiled when the Trump Administration — in a single, sweeping move — slapped broad tariffs on all of America’s trading partners. While many agree that rectifying unfair trade practices is necessary, the abrupt imposition of high levies across the board triggered a wave of panic and uncertainty across markets.
Shortly after “Liberation Day” on April 2, 2025, when a 10% baseline tariff on most imports took effect, President Trump and his team began to roll back portions of the program once they recognized the markets would not stomach such an all‑or‑nothing approach. The Trump tariffs serve two aims:
1. Force trading partners back to the negotiating table to hammer out fairer terms;
2. Boost federal revenues by an estimated $2 billion per day, funds that will be touted in support of additional tax cuts this year (Bloomberg, May 2025).
These policies might ultimately benefit U.S. residents in the long run. However, for those operating in the short‑term business‑purpose lending (BPL) space — including residential transition loans (RTL) and debt service coverage ratio (DSCR) products — the immediate fallout is proving challenging.
Economic Indicators Show Cracks Beneath the Surface
On the surface, many headline indicators of economic health remain robust. Yet, recent data reveal stress points that echo the ominous “da‑dum da‑dum” of the “Jaws” theme, signaling another “attack” may be imminent.
GDP contracted at a 0.3% annual rate in Q1 2025 — the first quarterly decline since early 2022 and the weakest performance since the pandemic recovery began (Bureau of Economic Analysis, May 2025). Inflation pressures intensified: the core personal consumption expenditures price index rose 3.5% year‑over‑year, the highest reading since late 2022 (Fed PCE Report, May 2025). Although the headline unemployment rate held at 4.2% in April, payroll gains slowed to 177,000 jobs (below consensus forecasts), and consumer sentiment tumbled to its lowest level since May 2020 as households grew wary of future income and business conditions (Conference Board, April 2025).
Investors digested this mix of weakness and uncertainty by ending the S&P 500’s nine‑session win streak on May 5, a sign that equity markets remain on edge (S&P Dow Jones Indices, May 2025).
Powell’s Dilemma: The Fed’s Balancing Act
Fed Chair Jerome Powell now faces conflicting pressures. On one hand, the White House is urging rate cuts to stimulate growth. On the other hand, ongoing tariff-induced price pressures pose their own inflation threat. At his May meeting, Powell maintained the federal funds rate at 4.25–4.50%, monitoring labor markets and prices for guidance instead of yielding to political pressure (Federal Reserve, May 2025).
Market projections now suggest a possible rate cut as soon as July, but only if hiring slows or inflation moves closer to the Fed’s 2% target (CME FedWatch, May 2025).
Trade Deals on the Horizon?
Amid these tensions, President Trump has indicated that new trade agreements “could very well be announced this week,” raising hopes that some tariffs may be eased in exchange for deals with India, South Korea, Japan — and potentially China, which holds approximately $800 billion in U.S. Treasuries (Reuters, May 2025). Whether these negotiations yield results — and whether they alleviate both economic and geopolitical concerns — will play a significant role in determining the trajectory of interest rates and the fortunes of private lenders in the months to come.
Credit Spreads and Market Liquidity
Meanwhile, credit market data highlight the pressure on capital costs. The spread on BBB-rated corporate bonds widened by 15 basis points in April, reflecting investor caution amid tariff uncertainty and slower growth (ICE BofA, May 2025). Leveraged loan spreads also increased, with the average margin for new issues rising to L+400 basis points, the highest level since late 2023 (LCD, May 2025). In the private credit secondary market, bid-ask spreads have widened as LPs reduce exposure, limiting liquidity for those looking to downsize risk (Preqin Secondary Markets Monitor, Q2 2025). These conditions raise funding costs for bridge loan and mezzanine financing, challenging lenders to maintain underwriting standards while preserving margins.
Implications for Private Lending
For private lenders and investors in the BPL space, the convergence of tighter policies, rising costs, and wavering demand presents both risks and opportunities. According to internal data from Private Lender Law, April 2025 marked the weakest origination month since April 2020, when the pandemic shut down markets. Early May has shown tentative signs of recovery, as investors dip their toes back in and borrowers carefully resume transactions.
However, the underlying current remains turbulent, and professionals across the industry are preparing for potential headwinds. With banks strengthening reserves against recession risks, private credit — particularly asset-backed RTL and DSCR financing — continues to attract capital due to its agility and yield advantages.
For private lending, specifically the RTL and DSCR products, to succeed, the economy must promote a viable and certain transactional world. Any further disruption will hinder the private lending industry’s ability to grow and thrive.
Outlook and Strategies for Lenders
To navigate these choppy waters, private lenders should:
» Prioritize asset-backed structures and conservative loan-to-value ratios to reduce collateral valuation risk.
» Maintain strong liquidity buffers and diversify funding sources, including warehouse lines, institutional credit, and NAV financing.
» Keep a close eye on trade negotiation developments and adjust pricing models to reflect tariff-related input costs.
» Utilize flexible covenants and stress-testing frameworks to guard against rapid rate changes or credit shocks.
» Form institutional partnerships to tap into the sustainable demand for direct lending and asset-backed credit strategies.
My advice: Proceed with caution, preserve liquidity, and always remember “You never know when you’re going to need a bigger boat.”
