Why I turned down cheap institutional capital — and what that decision protects you from

WHY WE DON'T TAKE INSTITUTIONAL CAPITAL

I get asked this question a lot.

"Devon, why don't you take institutional capital? You could scale faster. Fund more deals. Grow the loan book quicker."

The answer is simple: all money is not good money.

Let me explain.

THE TWO MODELS IN PRIVATE LENDING

There are two ways to build a private lending business.

Model 1 is institutional capital — banks, funds, credit lines from Wall Street. It gives you access to cheap capital at 7 to 9%, lets you fund high volume, and lets you scale quickly.

Model 2 is balance sheet lending — your own capital plus individual investors. It gives you full control over your credit box, your decisions, and the relationships you build.

Most lenders choose Model 1. It is fast, it is cheap, and it scales.

At 42 Solutions, we chose Model 2. Here is why.

THE PROBLEM WITH INSTITUTIONAL CAPITAL

When you take institutional capital, you do not control your business anymore. The institutional provider does.

They dictate what deals you can fund, what rates you can charge, what markets you can operate in, and how fast you can move. Their credit box. Their approval process. Their risk models.

And here is the part most people do not think about until it is too late: they can pull their capital at any time.

It does not matter how well you are performing. If the institutional provider decides private lending is too risky — a market downturn, a regulatory shift, an internal risk committee decision — they pull back. And you are left with borrowers mid-project, draws pending, a full pipeline, and no capital to fund it.

You built a business on capital you do not control. That is fragility by design.

WHAT WE SAW IN 2023 TO 2024

This played out in real time.

When interest rates spiked in 2023 and the regional banking crisis hit in early 2024, institutional capital providers pulled back from private lending fast. Lenders doing $50M to $100M per year had their lines cut. They went from closing 10 deals a month to 2 deals a month — not because their borrowers were defaulting, not because their underwriting failed, but because their capital source decided to reduce exposure to real estate debt.

They had no control. Their borrowers paid the price.

THE COMMODITY TRAP

There is a second problem with institutional capital that does not get talked about enough.

When your capital costs 7 to 9%, you start competing on price to deploy it. Rates drop to 10%, then 9.5%, then 9%. You chase volume instead of quality. Every deal starts to look the same. Every borrower gets the same terms. No exceptions. No flexibility. No relationships.

You become a commodity.

And when the market turns, commodity lenders get hit hardest. Because they underwrote for volume, not safety.

HOW 42 SOLUTIONS IS BUILT DIFFERENTLY

We are a balance sheet lender. That means I own the capital — my personal capital plus 42 Income Note investors — and I make the decisions.

No institutional committee approval. No rigid credit box dictated by a fund. No capital that disappears when a risk committee changes its mind.

In practice, that means our borrowers can close fast, receive draws within 24 hours, and work with a lender who can make common sense exceptions for experienced operators with strong track records. Terms quoted on Monday are terms at closing. No bait and switch.

Institutional lenders cannot operate this way. They are constrained by the provider sitting above them.

For our investors, this stability matters just as much. When you invest in 42 Income Notes, you are backing a business that is not dependent on capital that can disappear overnight. We are not chasing volume to deploy cheap money. We underwrite conservatively at 70% LTV, first position only, because we control the credit box and we intend to keep controlling it.

THE TRADE-OFF

Is this model slower to scale? Yes. Could we grow the loan book faster with institutional capital? Absolutely.

But we would lose control over our credit box, our ability to make exceptions, our relationship-based model, and our stability when institutional capital pulls back. That is not a trade-off I am willing to make.

I am building 42 Solutions to last 30 years. Not to scale fast and blow up in the next downturn.

THE BOTTOM LINE

Institutional capital looks attractive. It is cheap, it is abundant, and it scales fast. But it comes with strings that limit your flexibility, commoditize your business, and create fragility exactly when markets get hard.

Balance sheet lending is slower. It is also the only model I trust to still be standing when the cycle turns.

That is why we do not take institutional capital.

And that is why our borrowers and our investors sleep better at night.

If you want to talk through how we underwrite deals or how 42 Solutions thinks about capital structure, reply to this email. I will walk you through it.