High flying hedge funds and sophisticated private equity companies are known for playing the capital market fast and loose.
They pile on leverage and make big bets on stocks, bonds, options and futures, or, at-least they used to.
  Over the course of the last 24 months the traditional equity and debt markets have been crushed.
Money managers all across Wall Street have lost billions for their wealthy clients.
The markets are showing signs of recovery but hard, costly lessons have been learned.
  Even big money hedge fund investors hate to lose money and many are seeking a more conservative way to make high returns on their capital.
  Money managers are increasingly embracing private commercial mortgage lending as a way to enhance yield and decrease the overall risk of a portfolio.
The credit crisis has greatly reduced the availability of commercial mortgage capital and, at-the-same-time, made it harder for borrowers and buildings to qualify for financing.
The result is a glut of good deals that should be funded but can't be funded.
  Some hedge funds are stepping in and helping fill this "funding gap".
This unprecedented move by private investment funds into commercial real estate finance was prompted by the demands of unhappy investors.
When wealthy business people put several hundred thousand in a fund and pay a hefty management fee, they have the right to expect results.
After being promised double digit yields, many investors lost large amounts of money and actually had trouble accessing the money they had invested.
  Faced with disgruntled and disenchanted clients, fund managers were desperate for a high return investment that offered at least some measure of real security.
For many, private commercial mortgage loans have proved to be the answer.
Unlike residential lending, commercial mortgage banking is largely unregulated and posed no barrier to entry for private investment funds.
The credit crunch was (and is) keeping real estate investors, large and small, from obtaining the capital they needed to refinance their buildings or buy any new ones.
Thousands of excellent deals with very reasonable risk parameters were (and are) going unfunded and the lack of institutional credit drove private lending rates high enough to pique the interest of even the most sophisticated and return hungry fund managers.
  Hedge funds and private equity firms are finding that they can charge annual rates of 12% or more on the money they lend while their investment capital is fully secured by valuable commercial real estate.
Most private lenders require a direct 1st mortgage lien on any property they lend against allowing them to take possession of an asset if the borrower defaults.
They can then sell the real estate on the open market to recover some or all of their principle.
Very few hedge funds will lend more than 65% of the value of the target property, so their capital is very well collateralized.
  Commercial mortgage lending will never replace traditional stock market investing by hedge funds or leveraged-buy-out strategies by private equity companies; lending money just does not offer the incredible upside potential that is possible in the capital markets.
However, money mangers are finding that they can earn very respectable, double digit returns with much more security.
  If a public company goes out of business its stock can go to zero; an equity investor can be wiped out.
A lender, on-the-other-hand, will always have the ability to repossess the real property and recover at least some of their investment.
  In recent months hundreds of millions of dollars have been committed to commercial real estate lending by private hedge funds and private equity firms.
This trend should continue as the credit crunch drags on and borrowers search for alternative sources to refinance or purchase commercial buildings.