---
title: "Private Credit: The Collateral Question"
description: If a loan defaults, some collateral walks out the door and some stays put. JLAM discusses how family offices evaluate private credit collateral.
image: https://blog.jlamre.com/hubfs/AdobeStock_267982755%20(1).jpeg
---
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# Private Credit: The Collateral Question
[.jpeg "Private Credit: The Collateral Question")](https://blog.jlamre.com/hubfs/AdobeStock_267982755%20(1).jpeg)
## Inside the Institutional Blind Spot
### *As private credit becomes a bigger part of family office portfolios, the label matters less than what stands behind the asset.*
---
"Family offices should lean into private credit" has become one of the most repeated ideas in the alternative asset conversation. The asset class is attractive because it can generate predictable income, and it’s rapidly becoming a fixture in family office portfolios. The average allocation rose approximately 33% between 2023 and 2025, and the share of family offices with exposure climbed from 64% to 74% over the same period. More than a quarter of offices participating in a 2025 Goldman Sachs survey planned to increase their holdings.1
If yours is one of them, it’s important to unpack the label. "Private credit" is a broad umbrella that includes direct lending, asset-backed financing, preferred equity, and other options. Each has distinct benefits and risks. The importance of thorough analysis becomes apparent when a company runs into trouble. As a result, one of the first questions to ask as you delve into private credit is this: if this loan defaults, what will be recoverable?
---
## Direct Lending: Betting on the Borrower
Direct lending, which continues to be the largest segment of private credit, sits at the senior end of the capital stack, secured by corporate recourse and a lien on the borrower's assets.2The lender is repaid primarily from the operating cash flows of the business, with collateral serving as a credit enhancement rather than the primary source of repayment.
That protection can be thinner than it appears. Consider a loan to a software company, since software company loans comprise nearly a quarter of private credit lending.3The collateral is largely intangible, including intellectual property, contracts, and key personnel. If the business falters, much of it can walk out the door. The engineers leave and take with them the knowledge that makes the code valuable. When a loan like this goes bad, what remains may be a room full of laptops and no one left who knows what to do with them. Seniority offers limited comfort when the equity cushion beneath the loan has already eroded, so recovery often depends on what the business is worth when distress arrives.
Direct lending can offer a steady, contractual yield. But that yield is earned by accepting the borrower's ongoing performance as the primary source of repayment, with returns capped at the coupon and no participation in the company's growth. It suits investors who want predictable income and are comfortable underwriting the enterprise rather than the asset.
Investors who want the opposite trade, collateral first and the borrower’s performance second, often look to the intersection of private credit and real estate, where real estate-backed credit is, in our view, the truest form of asset-based lending. Most family offices run a private credit sleeve and a real estate sleeve. Real estate-backed credit can sit in one, or both, of those sleeves. Where it sits usually comes down to the role it plays in the portfolio. Allocators who value the fixed return and priority position often treat it as credit, a collateral-backed alternative to corporate loans. Others place it in the real estate sleeve as a way to gain property exposure with more protection than common equity.
## Asset-backed finance: Betting on the asset
Asset-backed finance moves the focus from the borrower to the specific assets that secure the loan. Underwriting weighs the value, performance, and characteristics of those assets, as well as the systems used to service and monitor them. Asset-backed finance has become the fastest-growing segment of private credit, a shift *Global Market Insights* describes as private credit moving "from enterprise-value and cash-flow lending toward collateral, servicing capability, and asset-level performance."2
Commercial real estate offers a clear example. The borrower's promise is backed by a tangible asset with an identifiable market value and cash flow stream. If the borrower defaults, the lender has something it can value, manage, and sell. The collateral stays where it is. But the building protects a position only to the extent that its value exceeds what is owed ahead of it. For a senior lender, that cushion is all the equity beneath the loan. For a preferred equity investor, it is the common equity, which absorbs the first loss. The key question is how far the property’s value could fall before each position is impaired.
It’s important to recognize that "real estate" is a category, not a strategy. It is as important to distinguish between real estate opportunities as it is to understand private credit options. When evaluating real estate, one consideration is the property profile. A stable asset with cash flow produces income now and typically carries less risk. A half-built or transitional project may offer greater value creation potential. However, there is usually no-to-limited current income until the project stabilizes. One profile is not inherently better than another. They offer different risks and benefits. A thoughtful strategy may blend the two, pairing current pay from stabilized assets with longer-horizon upside from development to diversify the sources of return.
The signals that reveal which profile you are buying are rarely found in the headline rate. As analysts review opportunities, the precision with which the manager can articulate the role is key, as are the asset type and development stage (new build, recapitalization, redevelopment, or a reimagining). Recognizing which overlooked building in which constrained market can be brought back to life is a judgment that comes from experience and understanding of specific market dynamics.
## Preferred equity: A capped return, less armor
Preferred equity sits below debt in the capital stack. Instead of a lien, preferred holders rely on structural protections: a fixed preferred return, priority over common equity, and remedies such as the right to take control of the property-owning entity, forced sale provisions, and pledges of equity.
How an allocator accesses preferred equity also shapes the risk. A diversified vehicle spreads exposure across multiple properties, so one weak asset has less effect on the overall result. A single-asset investment, by contrast, concentrates exposure in one property, so the allocator must have conviction in that specific asset. Step-in remedies matter here, but only if the investor has the know-how to operate real estate. Either way, the allocator is relying on the manager’s ability to protect the position when something goes wrong.
A hybrid manager like JLAM, which leads preferred equity investments in projects and assets much like the ones it develops and operates, is positioned to negotiate and act on those remedies. We have years of direct development and operating experience that helps “right the ship” on a project if construction stalls or a stabilized asset is poorly managed. That puts our team and our partners in a different position than a financial manager holding step-in rights on paper but without the experience to identify issues and implement solutions.
Kennett Square, Pennsylvania demonstrates what that looks like in practice. The historic Chester County town's brick main street runs above 90% occupancy across apartments, offices, and shops, while a restrictive zoning code makes meaningful new supply almost impossible to add. When an operating partner brought an opportunity with two landmark buildings on that corridor, JLAM stepped in with preferred equity, establishing a fixed preferred return that ranks ahead of the common equity. We evaluated what would have to go wrong to threaten our position in the structure and built the deal around the answer.
In general, preferred equity aims for a higher-yield hybrid position, seeking to reward investors with a set preferred rate of return that is senior to common equity. That capped return is paired with priority distributions, so the larger upside, and the larger risk, stay with the common equity. In exchange for a yield above senior debt, investors accept more flexible structural protections in place of hard enforcement rights.
## Evaluating private credit
For a family office CIO, asset analysis is an integral part of the job. Oftentimes, strong evaluation is less about the asset class and more about the manager. CIOs must assess each manager's investment philosophy, discernment, and discipline, and review the track record it has produced.
While large institutional funds may offer some attractive opportunities, they often cannot participate in midsize projects in growing secondary and tertiary markets that need flexible, well-structured capital. Institutional investors are generally too large for these deals, and traditional lenders are often too rigid, leaving fundamentally sound projects undercapitalized.
JLAM steps into this gap by providing preferred equity for projects and properties in secondary and tertiary markets across the Mid-Atlantic and Southeast that we understand firsthand because we have built, owned, and operated similar assets ourselves. That firsthand experience gives us an embedded knowledge of these markets that larger investors working from different inputs can miss. Our hybrid perspective, part developer and part disciplined investor, allows us to underwrite with clarity and move decisively when opportunities emerge.
The target result is a portfolio of preferred equity positions designed to deliver reliable income, strong collateral protection, and long-term relationships with high-quality sponsors. By filling a market void with experience-driven capital, we help turn overlooked opportunities into stable, income-producing investments built on higher standards.
There is an evergreen case for real estate as collateral. If something blows up, there is an asset with some residual value. However, it is important for analysts to carefully review and compare opportunities. Previous cycles are full of fire sales, which is why selection is critical, discipline is required, and skilled execution is crucial. Look beneath the label, match each capital position to a clear risk and return expectation, and choose a partner whose judgment you trust when things go well and when they do not.
---
### Frequently Asked Questions
How should a CIO underwrite collateral risk differently in real estate-backed credit versus preferred equity?
A senior real estate loan is secured by a mortgage on the property, so diligence centers on the property’s valuation and how much equity sits behind the loan. Preferred equity sits behind the debt and relies on negotiated protections rather than a mortgage. Each offers a different level of risk and a corresponding different expected return. In both cases, the analysis weighs how far the property’s value could fall before the position is impaired. For preferred equity, it also weighs whether the manager can actually exercise those protections under stress.
What separates a manager who holds step-in rights on paper from one who can act on them?
Negotiated remedies, such as step-in control of a property-owning entity, only protect a position if the holder can realistically execute them. An investor with no development experience may hold the same contractual rights as an expert real estate operator and still be poorly positioned to fix a stalled project. The diligence question isn't whether the remedy exists. It's whether the manager can effectively use it under stress.
How does concentration risk differ between a diversified preferred equity vehicle and a single-asset preferred equity position?
A diversified vehicle spreads exposure across properties, limiting the impact of any one underperforming asset, and pooling cash flow and returns across multiple positions. A single-asset position concentrates that exposure entirely, raising the bar on asset-level conviction and making risk management far more consequential, since there is no portfolio effect to absorb a misjudgment. Allocators comparing the two are weighing diversification against conviction in a single asset.
Why does the property profile matter as much as asset class when evaluating real estate-backed private credit?
New development, repositioning or transitional projects, and stabilized assets each carry a different risk and return profile, even within the same property type. Stabilized assets typically produce current income with lower execution risk. Transitional projects carry value-creation upside, but generally have limited cash flow until they are stabilized. Neither is superior. What matters is whether the manager can price and manage each profile's specific risks.
What does the shift toward asset-backed and collateral-driven underwriting signal for private credit allocators?
Underwriting emphasis has moved from enterprise value and cash flow toward collateral quality, servicing capability, and asset-level performance. That shift raises the bar on manager diligence. It's no longer sufficient to evaluate a strategy by its label or headline yield. The more relevant question is whether a manager's process and protections, and their expertise, are built around the specific collateral it underwrites, rather than a generalized private credit thesis.
How does a hybrid developer-investor model change the risk calculus in real estate preferred equity?
Investing with a manager that brings investment and development capabilities together can add value across the entire investment life cycle. Development and operating experience sharpens how a manager evaluates sponsors, underwrites projects, and structures deal terms, which leads to enhanced selection (and avoidance). It also improves monitoring, so issues can surface early and the manager can offer value-add counsel to the sponsor before small problems become big ones. If a serious issue arises, the manager has the experience to step in and replace the sponsor to support capital protection. That experience specifically matters in secondary and tertiary markets, where fewer institutional-grade comparables exist and embedded market knowledge becomes part of the collateral protection itself.
1 Goldman Sachs, [*Family Office Investment Insights Report: Adapting to the Terrain*](https://www.goldmansachs.com/pdfs/insights/articles/adapting-to-the-terrain/family-office-investment-insights-report.pdf), 2025
2 Global Market Insights, [*Private Credit Market*](https://www.gminsights.com/industry-analysis/private-credit-market), 2025
3 Goldman Sachs Research, [*Top of Mind: Cracks in Private Credit*](https://www.goldmansachs.com/pdfs/insights/goldman-sachs-research/cracks-in-private-credit/TOM_private%20credit_Redacted.pdf), 2026.
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## Related Posts
#### [The Operator-Developer Difference](https://blog.jlamre.com/the-operator-developer-difference)
#### [Inside the Institutional Blind Spot](https://blog.jlamre.com/inside-the-institutional-blind-spot)
#### [Why We Create Differentiated Assets](https://blog.jlamre.com/blog/investment-strategy/why-we-create-differentiated-assets)
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