How easily can you reposition your business model to weather the bad times?

Unprecedented. Pivot. Peloton. Puppies. Quarantine. Zoom.

These are just some of the words that have come to embody our current environment.  How did we get here?

In January 2020, the private lending space and the economy were humming along. At my company, Specialty Lending Group (SLG), we had just begun to explore new opportunities, including efforts to capture greater market share, starting a new fund to help with our forecasted growth, and actively seeking new loans. In March the world—and all plans—came to a standstill. Unbound optimism was replaced by uncertainty. As the global pandemic hit U.S. shores, loans came to a halt and the industry turned inward to assess and re-evaluate. The forced shutdown of the economy and the stay-at-home orders, provided the industry—and me, personally—with time to reflect.

Prior to the global pandemic, the private lending industry was getting increasingly crowded, margins were being squeezed by easy access to both credit and capital, and loan volume was at an all-time high.  As uncertainty about the length and effect of the economic shutdown persisted, a retreat to basics became necessary.

Retreat, Reflection and Reevaluation

At SLG, we went from an offensive strategy to a defensive one. Stuck at home, I had the luxury to reflect on industry trends and loan performance in real time.  We took a deep dive into the health of both our loan and our real estate portfolios. We looked at our performing and non-performing loans with the objective of creating different exit strategies based on various scenarios for all categories of assets.  Like many other private lenders, we decided to temporarily suspend lending while we re-evaluated the market and considered the uncharted terrain. Unfortunately, we were under-capitalized at exactly the wrong time.  We had to retreat and map out a survival plan.

Where better to retreat than a remote cabin in the middle of Canada?  After being quarantined in Washington, D.C. from March to June and rarely leaving our home, my family headed north to the Canadian Shield.  Lucky for me, I married a Canadian, so we were all able to get away, gain entry, and regain perspective. Being able to spend more time with my family had a grounding effect on me. Combined with being away surrounded by big open sky, I had some space to really dig into my business, how the industry was reacting, what SLG needed to do, and how SLG would fit into a post-COVID world.

Although markets seized up at the beginning of the pandemic, as the summer progressed, those who were well-capitalized were poised to take advantage of the cash crunch plaguing many lenders.  As secondary markets closed, some lenders were left holding loans on warehouse lines or in cash, creating liquidity challenges. Even those who had ample access to funds went into caution mode, making getting a loan became much more difficult.  Only the most experienced and qualified borrowers could get loans, and those loans were issued at much more conservative LTV and LTC limits and higher rates and cost.  This re-created the opening for the kinds of margins that had all but disappeared pre-COVID.

Time to Pivot

At that time, SLG was not in a liquid position to leverage the opportunities created by the tightening of the private lending market. We had to pivot and figure out where our sweet spot was.  It is trite to say that within every crisis there is opportunity for those ready to seize it.  A global pandemic was not something that we had anticipated, or ever experienced, so the ensuing recovery remained unknown. Seizing opportunity required foresight and a steadfast confidence.

After taking a step backwards, SLG reverted to the plans we had been making before the pandemic. Of course, we had to adapt to new circumstances and tinker with implementation. We decided to move forward by leveraging technology and broadening our product offerings.  Although everyone has had to learn how to leverage technology to work remotely, our objective was to use technology to become leaner and more efficient. Our pivot also included broadening our product offerings and creating additional business lines and sources of revenue.  To do this, we looked to SFR long-term rental programs, commercial, multifamily, and owner-occupied loans.

In times of turmoil and uncertainty, it is always best to return to your roots.  I began my career as a residential mortgage lender.  When the Fed dropped interest rates to zero in March 2020—and then pledged in September to keep it hovering around zero for years to come—the residential mortgage market exploded. During my career, I had built and run two successful residential mortgage companies, so adding owner-occupied loans to our product offering seemed like a no-brainer. To facilitate this move, I decided to reinvigorate the brand I had left behind when I turned my focus to private lending.

SLG has also turned to new business verticals that leverage our private lending experience. We are building a real estate development arm, investigating ways to enter the PropTech market, and becoming a stronger, more reactive and flexible platform for private lending.

The best way to survive in times of uncertainty is to have a diversified business model so that different business lines can support and grow from one another. We have re-opened for business leaner and more diversified.

Lessons Learned

As we retreated into our homes in March, and the world as we knew it came to an abrupt halt, suddenly there was room for reflection.  What I realized, aside from the need for diversification within the company and multiple buckets of capital, is that life is about how you react in the face of adversity, not about how successful you are when things are easy.  Without the time to reflect, you can continue down a path and not even realize that it may not be your path.  Sometimes, when you think you should be going in one direction to get to where you are going, you need to pivot and go in a different direction.

When I consider the lessons I have learned during these trying times, I would say that living your life and finding time to spend with the people who are most important to you is what really matters.  That is the key to a successful business career.

I also learned that as a private lender, you need to find the time in your day to review where you are.  You must identify and get in front of small problems before they snowball and become big problems.  When times are good, success is easy. The real question is: How is your portfolio and your business model positioned to weather the bad times?