Raising capital is one of the most difficult aspects of building a successful private lending business. The capital-raising framework you choose early on will shape nearly every strategic decision that follows.

Key considerations include fund versus non-fund structure, debt vs. equity capital raising, anticipated scale, and the types of investors you plan to target and whether that profile will evolve as the business matures.

Raising capital as debt carries significant limitations that private lenders must weigh carefully against their strategy and growth expectations.

Fund Structures

A common way to grow a scalable investor capital base is through a fund structure.

Funds are the primary way to raise capital as equity, unless you plan to give up ownership in your lending business. The term debt fund technically refers to the type of assets held by the fund, meaning any fund containing mortgages qualifies as a debt fund. But since mortgage funds can raise capital as debt or as equity, we’ll use the term promissory note debt fund throughout this article specifically for funds that raise capital as debt.

Raising capital as equity involves having a general partner/limited partner (GP/LP) structure, a situation where the private lender often owns the GP—the entity that manages the fund and often invests in the fund—and offers LP ownership interests in the fund to investors in exchange for their capital.

Because investors are treated as owners and, therefore, as equity, they are inherently subordinated to senior secured credit facilities, such as a bank line of credit (LOC). This makes obtaining an LOC easier. Investors are typically paid in an equity style: Fees and expenses are defined first, and the investors receive the income that remains.

Under this framework, as the fund experiences good and bad performance, manager fees and expenses are paid first, and the resulting investor yield fluctuates correspondingly. One challenge GP/LP fund managers face in raising capital, particularly early in the fund’s life, is the lack of defined investor yield and track record of average returns, creating a yield uncertainty that may give potential investors pause. It is possible to have more defined returns for investors if desired, which often involves a preferred return, various share classes, or sometimes even an explicitly defined yield.

An alternative structure addresses some of the challenges by raising capital as debt instead. Raising capital as debt can take a variety of forms, but as the name implies, it often involves issuing promissory notes to investors with specific maturities and defined yields. Capital raising can occur within or outside a fund, and various structures include directly assigning and endorsing individual mortgages and notes to investors, issuing security agreements to collateralize the investor notes with specific mortgage loans, offering Borrower Payment Dependent Notes (BPDNs), or using the private lending or fund entity to issue unsecured debt.

Either of these structures can be open-end/evergreen funds (with no defined maturity date for the fund) or closed end (the fund has a defined date at which capital raising stops and the wind down period begins). This distinction shapes how investors ultimately receive their principal back.

The mechanism for investors receiving their principal back differs between the two. For equity funds, whether closed-end (prior to maturity) or open-end, an investor must formally request their capital back via a redemption request. There has been a lot of news this year about high levels of redemption requests with private credit funds, making it imperative for equity-style funds to have strong gatekeeping rights (i.e., the ability to pause redemptions if liquidity is insufficient). For debt structures, promissory notes have defined maturity dates, so the concept of a redemption does not apply; however, it is still good practice to stagger maturity dates and build in notification periods to manage liquidity.

The Debt Capital Trade-Off

Dating back to the early years of private mortgage lending, raising capital as debt has often been viewed as the path of least resistance. There are many reasons for this, but these two stand out:

The investor. The most natural investor in private bridge mortgage loans tends to be a real estate investor, someone already familiar with the underlying asset class, accustomed to underwriting individual properties, and comfortable taking ownership of specific real estate. That familiarity makes the leap to debt investing more intuitive.

Rate of return. Whether inside a fund structure or not, investors in debt secured by mortgages are accustomed to earning a fixed rate of return.

Promissory notes are a straightforward mechanism for defining the rate of return, and structures like trust deed investing, BPDNs, or similar arrangements make it easy to assign individual notes to investors, creating an investment vehicle that feels familiar to real estate investors.

That said, promissory note debt fund structures come with several potential shortcomings:

Scaling challenges. Matching an investor (or multiple investors) with individual loans can be challenging for timely closings and scaling, both because of the difficulty in aligning liquidity inflows and outflows and because investor preferences may not align with the loan opportunities available.

Liquidity gaps. If deteriorating performance or cash drag reduces yield on the portfolio, the fee and interest income may be insufficient to pay the fixed rates on the investor notes, which could result in the private lender having to pay the difference out of pocket or risk defaulting on the investor notes.

Fewer tax benefits. Only GP/LP style funds permit the addition of real estate investment trusts (REIT) or sub-REIT structures to provide tax benefits to investors.

Smaller investor pool. Institutional investors (e.g., family offices, endowments, and registered investment advisers/wealth managers) may prefer or even require that investments be made as LPs, so raising capital as debt may inhibit institutional capital relationships as your lending business grows.

LOC limitations. Most banks or other LOC providers will only lend to funds, with the majority of those requiring GP/LP funds.

Equity Fund Considerations

As the fund model has evolved, it has become common to more clearly define the rate of return to investors in equity funds. There is nothing that prevents a GP/LP style fund from defining the rate paid to investors and having any excess income flow through to the GP/fund manager. More commonly, to protect the manager, fund expenses and a base management fee are defined and paid first. Then a fixed preferred return to the investors is paid, with any additional income split between the GP and LPs based on certain thresholds and percentages.

A hot topic so far this year has been redemption rights and restrictions for investors. There is a natural push-and-pull between what investors want (quick and easy return of principal when needed) and what fund managers want (stable capital where withdrawal requests cannot force liquidation of assets prematurely).

Although some investors may prefer more return of capital flexibility, most savvy investors will understand the need for these redemption restrictions and limitations to ensure stable liquidity to run the lending business. As many private lenders have experienced, not having reliable capital to close deals can be the fastest way to turn off borrowers and crater a lending business. Institutional or large LPs may request additional flexibility in exchange for large investments, so the trade-off between this and how other LPs or LOC providers may view this special treatment should be evaluated.

To maintain a reliable capital base and avoid being forced to wind down the fund, the following are common redemption guardrails in GP/LP funds. These are often employed together to protect the fund, its investors, and its managers from withdrawal activity too abrupt or large for the fund to sustain.

Initial lockup periods. These are typically 12 months.

PPM language. The fund’s private placement memorandum (PPM) will often include language stating the fund is not obligated to liquidate any assets, properties, or loans to accommodate a member‘s withdrawal or redemption request.

Caps on individual investor redemptions. For example, a fund may limit redemptions to 25% of an investor’s balance per quarter, meaning it would take a year for an investor to be repaid their entire capital investment.

Caps on total investor redemptions. For example, a fund may limit redemptions to 10% to 20% per year. As a real-world example, one leading private asset management firm enforced a 5% total redemption cap per quarter in early 2026.

Use of a REIT or sub-REIT structure has surged in popularity in GP/LP funds since the passing of the One Big Beautiful Bill Act of 2025, which removed the 2026 sunset period for the qualified business income deduction (QBID). There are many considerations involved in these types of structures that should be evaluated carefully. The main benefit is the 20% deduction for the REIT dividend, regardless of an investor’s tax bracket.

Debt Fund Considerations

Raising capital as debt via investor promissory notes, whether inside a fund or not, involves analogous practices to those used in GP/LP funds to maintain capital base stability, and these are worth considering carefully.

Maturity dates of promissory notes can be staggered to avoid significant capital needing to be returned at the same time. Monitoring a large pool of investor notes with varying maturity dates can be challenging, but the benefit of smoother cash flow changes allows for better liquidity management.

Including auto-renewal provisions in the notes can help to avoid renegotiating terms every time or accidentally being in maturity default. Additionally, requiring a notice period prior to maturity for investors to be paid back (e.g., 90 days or more) allows for proper liquidity planning. Notes can also have firm requirements that the return of principal prior to the maturity date be solely at the manager’s discretion.

If possible, avoid directly associating individual mortgage loans with specific investor notes. This approach is not only challenging to scale, but it also prevents LOC providers who may consider lending to non-GP/LP funds from providing debt on these loans (notes can only be pledged to one party—the LOC provider). Investors familiar with direct real estate investing may want to be associated directly with a small number of loans, but this structure is limiting for obtaining debt facilities and places a significant administrative burden on the fund manager to match each loan with its corresponding investor.

A clause can be included explicitly allowing the manager to delay principal repayments for a defined period, typically 90-180 days, when insufficient liquidity is available to repay matured investor notes.

The other complication that is unique to raising capital as debt is how this debt instrument may potentially conflict with an LOC provider. The requirements of senior secured credit providers, which are inherent in GP/LP style funds, would need to be explicitly stated in notes and if applicable, the fund’s PPM. Such investor promissory note requirements include:

Unsecured. There is no accompanying security agreement, UCC filing, or mention of individual mortgage loans in the investor note.

Expressly subordinated. Included are return of principal and the ability to stop payments to investors (with a mandatory return of improper payments) in an event of default on the senior credit facility.

Enforcement standstill during a senior loan default. Investors cannot seek remedies while the senior loan is in default, including acceleration, pursuing the guarantors, placing liens on the private lender, or pursuing repayment from any guarantors.

Notification. The senior lender may require notice if any investor notes are in default.

Each LOC provider has different requirements, so it may be possible for a private lender to obtain a debt facility without all of these requirements. But the more that are missing, the less likely establishing an LOC becomes. These may seem harsh to investors, and without them, most LOC providers cannot proceed, which is why many private lenders who use lines of credit prefer to raise capital into GP/LP style funds rather than include these provisions in their investor promissory notes (and, if applicable, PPMs). When raising capital as debt, private lenders often do not include all these provisions; adding them later can be challenging for existing investors.

Changing Investment Structures

Although not ideal, there are a few ways to change your investment structure after it has been established and raised investor capital. Most commonly, private lenders choose to migrate to a fund model as they grow, but experienced private lenders may opt to move out of a fund if their mandate changes or investor composition shifts. Additionally, if the available loan products or asset classes shift meaningfully, the investment structure may need to evolve accordingly.

Adding a REIT or sub-REIT to your GP/LP fund can be done for tax reasons, but because of the associated costs, fund managers often wait until reaching a critical size, like $50 million, before implementing. Though also not available until a fund reaches a certain size and track record, using leverage/debt or specific amounts of it can help manage cash flows or boost investor returns and often aren’t available until the fund reaches a certain size and track record.

As a private lending business grows and establishes a strong track record, private lenders may be able to raise capital in larger chunks or at lower costs. Early investors are often enticed by higher returns that account for the risk of new funds. But as the fund scales, asking those same investors to accept lower returns becomes necessary for profitability, although the conversation can be a delicate one.

Lastly, similar to REIT structures or LOCs, use of third-party vendors may only be appropriate as the fund grows, but they may be a requirement for larger, more sophisticated investors.

Depending on the structure of your private lending entity and the significance of the changes, modifications may be made in a variety of ways:

No fund. If not governed by a fund structure, the ability to retain investors is the primary driving force for whether to make changes.

Existing promissory note debt fund. Changes will need to be made to your PPM and/or individual investor notes. If only a PPM modification is required, depending on the type of change, you may need to notify or gain consent from your investors.

Existing equity fund. Like a promissory note debt fund, you may need to change your PPM and/or individual LP agreements. Similarly, you may need to notify or gain consent from your investors.

New fund. Rather than changing an existing structure, some private lenders choose to launch a new fund with new terms. If you choose to retain your old entity as well, you must determine whether you will continue to operate and raise capital into both entities, and if so, what differentiates the two and how to determine which assets go in which entity.

The biggest challenge most new private lenders face is lack of consistent liquidity, so there is a natural inclination to begin with structures that favor investor flexibility. Understanding, analyzing, and choosing a framework suited to your launch conditions and your future goals can save you headaches down the road. Flexibility and adaptability are core tenets of the private lending industry, and evolving the business is natural and expected. Education, communication, and managing investor expectations are key to maintaining strong capital relationships as your private lender develops.

The information contained in this article is for informational purposes only. To determine which structure may be right for your private lending business or how to adjust it, please consult your professional relationships (legal, tax, accounting, investors, etc.).