In this turbulent market, fund managers are asking themselves whether to double down or buckle down.

Manageable growth and increased market share are typically the goals of every new and existing fund manager. But in the current market, whether to grow and expand a company’s footprint and assets under management or to hunker down and circle the wagons has most finance professionals pacing the living room floor during the wee hours of the morning. An argument can made either way.

To Scale!

If you are one of the professionals in our lending world who is considering making the move to grow, here are some things you should consider.

First, think about how the growth of your company will meet the needs of your current client base. Also evaluate whether expanding will help you successfully meet the new needs your clients may have as market valuations change.

Second, it’s always a solid idea to look to others who are scaling successfully or who are mainstays in the marketplace. Ask yourself, “What are the other successful players in my swim lane doing?” Keep in mind, however, that all markets are not the same. What may have been a major win in the last market is not necessarily going to be a win in today’s market, which is characterized by the tightening of capital.

A CRE Analyst report shows a definite downward trend in big brokerage earnings for a few major players as of October 2023. The third-quarter earnings for the top six commercial lending houses (Newmark and Walker Dunlap) show some eyebrow-raising declines in commercial income. Other major players like CBRE, JLL, and Colliers have leveled off and stayed flat through stabilized growth or idol continuance. CBRE is down 11%; JLL, 9%; and Colliers, 4%; whereas Newmark is down 25% and Walker Dunlap is down more than 30% from 2022.

On the other side of the fence, however, are direct lenders in the fix-and-flip and DSCR spaces. Many of these direct lenders have shown massive fundings and success. These companies have long track records and are supported by experienced staff.

Most debt funds and REITS are not as large and established, so it isn’t really fair to compare apples to apples in this instance. If you’re trying to grow a smaller firm or fund, do so through goggles that clearly show manageable metrics that you can achieve through a slow-and-steady wins-the-race approach.

Remember, even the big and successful funds have seen their fair share of bumps in the road. They all have the following in common as they strive for consistent growth.

1. Realistic Expectation of Capital Availability and Leverage. Without these, it is hard to bring on new clients.
2. Proficient and Dedicated Team. You need people to manage new files, new banking relationships, and other new staff.
3. Clear Vision of Markets and Asset Classes to Pursue. This is perhaps the most important. A defined and strictly adhered to mission statement is a growing company’s best friend because it helps you measure performance and whether you achieve your goals.

The private real estate lending market is highly competitive, fast-paced, and consistently impacted by external factors. Strong and constant recruitment of capital infusions are important because they are a stabilizing force. A fund manager’s internal control of its own discretionary capital is important to managing growth and attracting new investors. Understanding the risks in our current turbulent market as well as creating strong internal documents to support streamlined policies are paramount for repeat success. Growth definitely can be achieved, but it must be tempered with a savvy and sharp plan to execute your vision as well as a multifaceted capital approach that covers many bases.

Not to Scale!

The flip side of the coin is to stay close to home and ride things out, all while staying strong and being known as the “go to company” in your focus area. History has shown that companies that are true “tent poles” of a local market do well and reduce long-side risk because they are such experts in their own backyard.

In today’s turbulent capital market and fast-moving real estate space, it has become very attractive to stay put and focus on what you specialize in. Micro market ownership is always a solid path for quality relationship building and repeat business. Following this strategy prepares a company for potential explosive growth when the market changes again, because you have served your local clients successfully and earned their trust during tougher times.

Companies (debt funds, REITS, brokers) that dominate a select MSA and product vertical typically emerge each quarter with strong numbers and happy investors. Why? Because through small and managed advances, they are able to stay true to their mission statement and key skill sets. Having trained and local “in-house talent” pays off by earning client confidence tenfold.

Besides dominating your local market, another crucial element of high-performance profitability when embracing a micro approach is sticking with asset classes your company knows very well. Branching into an entirely new lending lane isn’t a great idea in rocky times. Keep your focus on loan exits that can be achieved. A quality dismount is worth its weight in gold, both for the health of your fund and for its reputation for underwriting quality deals. Niche specialization always works best with a smaller team, a clear vision of that asset’s unique market, and a way to dismount should the current market get any tighter.

There are pros and cons to scaling or not scaling your company, but one thing is certain: If you aren’t ready to scale, it’s OK. Growth is a process. If you embrace it with patience and a long-term outlook for success, it will serve you and your investors well. There are great deals and quality returns to be had, even in today’s landscape.