Beyond Senior Debt: Key Takeaways From Our Alternative Private Capital Seminar

On 29 September 2026, Macfarlanes hosted Beyond senior debt: exploring alternative private capital strategies in real estate, a panel session chaired by Victoria Hills and involving Laura Bretherton and Jat Bains of Macfarlanes alongside Simon Mower of the Interpath debt advisory team. 

They discussed the evolution of the real estate financing market beyond traditional senior secured lending, how alternative capital positions perform through a cycle and the enforcement and the recovery playbook for alternative lenders when borrowers enter financial distress around real assets.

The panel covered a wide range of themes, from what is driving capital beyond senior debt, why operational real estate is at the centre of that shift, how lenders are approaching valuation and pricing and how alternative lenders handle distress. 

The current financing landscape for real estate assets: a market that has had to reset

In recent years, interest rates have stayed higher for longer, borrowers have been squeezed by rising construction and operating costs, while valuations have fallen and are only now starting to stabilise. A funding gap has emerged as a result whilst more traditional sources of capital have retreated and allowed private sources of capital to move in and help fill that resulting gap. 

This is not just a cyclical story. The real estate market itself has become more diverse, and assets are being operated and managed differently from before. Occupiers increasingly expect service and flexibility, not just space, which makes underwriting more nuanced. Private capital is well placed to respond. It tends to have more flexible lending policies across a wide range of fund strategies, from credit mandates to more opportunistic ones. In the background, back leverage and other structured finance products available to private capital providers can help them compete on cost of capital. 

Operational real estate: underwriting the business, not just the building

The topic of the growing operationalisation of real estate was a common theme throughout the discussion. What sets operational real estate (OPRE) apart from non-operational assets is that its value is derived from the performance of the underlying operating business, rather than the value of the bricks and mortar itself. Furthermore, the OPRE product offering can be distinguished as one between a service provider and a customer, rather than a landlord and a tenant. 

As the value for OPRE is derived from operational performance, the identity and experience of the asset manager, and whether their business plan is deliverable and stress-tested, are key aspects of the underwriting process of a lender. Alignment and incentivisation also matter, in order to create the conditions for managers to realise as much value as possible from operations. Managers may be engaged under a third-party management agreement or, increasingly, through a joint venture or co-investment with a promote. Either way, such arrangements needs to be properly diligenced by a lender at the outset of a deal. 

Following on from the above, lenders also need to think hard at the outset about what taking on the asset or business would actually look like in a downside scenario. Would they want to take the property and keep the existing manager, who may hold, or even control, the equity? Wiping out that equity position, linked to the point around incentivisation, is rarely motivational for a manager. If the manager does need to be replaced, what would that cost, how embedded is the brand, and could the asset run on a lower-cost model? 

The alternatives are often less appealing than they first look. Planning constraints make it difficult to repurpose assets into other sub-asset classes. Some assets take years to realise their full value. And sometimes there is no obvious replacement manager or operator, while a sale with vacant possession is hardly an attractive exit. The message for capital providers was clear: for OPRE assets, downside planning is a central part of a lender’s credit analysis, not a box-ticking exercise. 

Valuation, competition and pricing: more levers than loan-to-value

The panel described a market pulling in two directions: some participants are still looking backwards to historic yields, while elsewhere large valuation gaps are forcing lenders to take a view. How wide that gap is depends heavily on the sub-sector, and in some cases, leans towards 20% on certain residential assets. 

This is where credit funds have an advantage. They often have more flexibility and levers to pull. Alongside the ‘traditional’ loan-to-value measure, they can look at EBITDA multiples for operational assets, together with debt yield and interest service covenants. That matters, because LTV tests by themselves can be a blunt instrument, particularly on tighter-yielding assets where there is little room to maneuver.

Competition, resulting from a wide range of capital sources chasing viable deals, is also shaping terms. Lenders in the traditional capital space working within set parameters face borrowers who know they can push back on terms other, often private capital, lenders may not insist on. One way through has been to rely on longer-term sponsor relationships and the panel noted more of a trend towards sponsor recourse than before: some sponsors are guaranteeing repayment in certain circumstances. 

When things go wrong: a broader enforcement toolkit

Distress is where the differences between approaches taken by alternative lenders and traditional senior lenders show clearly. The panel noted that alternative lenders have a wider range of options in a "good asset, bad operator" situation. They can take the keys on friendly terms or, if needed, enforce, particularly through a single point of enforcement. They can then turn the asset around over three to five years to minimise losses, and in some cases outperform the original plan. This is not every manager's preferred strategy, and for some the old adage "first loss, best loss" still applies. Ultimately, success depends on the ability and willingness to do the hard work of turning the business or asset around. 

Larger managers have a real advantage, as they usually have more depth of resource and experience in the portfolio team to deliver a good outcome. That is harder for smaller managers whose resources are more stretched and who tend to operate on a smaller management fee base. 

Third party managed and/or branded assets can also bring their own complications. A third-party manager or brand owner may have approval rights over a lender stepping into the management contract or brand licence. In some deals, a very strong sponsor-manager/brand owner relationship can itself get in the way of a lender stepping in, so more consensual approaches might have to be explored on a deal-by-deal basis. 

Distress does not always end in enforcement. With so much capital available, there may be enough money in the market simply to refinance an existing distressed position. For some sub-asset classes, such as shopping centres, enforcement may even be the better route, where for example there are more favourable business rates treatment for vacant units if the property owner is in an English law administration process and a headline LTV problem does not necessarily mean a genuine structural issue: some assets, such as build-to-rent, may have a valuation issue but strong cash flows underpinning them. 

Contractor distress: when the problem is not the borrower

The panel also looked at development finance where the contractor, rather than the borrower, is the one in distress. Contractor insolvency is difficult under any structure. Here, at least, lender and borrower interests are aligned. Finishing the development takes time and a replacement team, and pricing will rise as the contract price is marked to market. In some cases that can leave equity under water at an elevated LTV or LTC. Against that background, the panel discussed a move towards more recourse to contractors and subcontractors, rather than relying on the main contractor alone. This is increasingly an area of focus when underwriting, in order to guard against a future contractor insolvency.

Looking ahead: opportunities and risks

The panel ended on a measured note. Broadly speaking, the increased availability of credit is keeping the market moving and explains the high level of refinancing activity, albeit the prospect of interest rate rises is a cloud on the horizon. The panel expects that activity to continue and to develop into more creative and flexible structures, both in deal terms and across the capital stack, to help unlock the challenges the market still faces. There is plenty of opportunity out there for credit funds with the appropriate specialist understanding of a given sub-sector to enable them to be more flexible and speedy than their competitors in the market.

Thank you to our panellists: Laura Bretherton, Macfarlanes, Jat Bains, Macfarlanes and Simon Mower, Interpath Advisory, moderated by Victoria Hills, Macfarlanes.

Macfarlanes is a pre-eminent law firm advising a global client base across Private Capital, Private Wealth, M&A and Disputes.

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