How to get a Debt Vehicle off the Ground

Honestly most are family offices, and back fill the syndication. On-top of that they can have note on note financing and warehouse lines of credit

My .2

For large DL funds, the key is being able to deploy large amount of capital quickly, in order to achieve scale and being able to generate decent carry pool. So I suspect that you cannot replicate in the SMEs space.

Regarding more sophisticated products, I would say it’s extremely difficult for the following reasons:

• entrepreneurs in that space are unsophisticated so you will have to spend a lot of time educating them / finding educated entrepreneurs

• cap stack are quite small and simple, so if capital is needed prob the entrepreneur can just walk into a commercial bank and borrow the amount needed without substantially dilute their returns

• mezzanine and pref would carry a very high K of capital, ie lower return to the Equity (inconvenient for the equity)

• given the risk of a SME, if the SME needs capital to grow, you will be better off probably with growth Equity, as the risk return makes more sense

I think some Italian SME PE (Read something on a place named Riello) are tryin to play in the PD space, unsure if successfully though

It's like raising capital for any fund. If you're providing bridge/mezz debt; you should be able to deliver relatively attractive returns if you can properly asses risk, sponsorship, and the market.

You're right that you will need more capital and the ability to deploy it quickly. A lot of startup bridge/mezz lenders utilize a warehouse line of credit, which if you're utilizing 20-40% of your own money on each deal you'll be able to obtain nice levered returns. However, you are usually limited to the lending parameters set by the warehouse line.

After a few years of using a warehouse line successfully, it should be a seamless approach into accessing small-balance institutional capital for a debt fund.

I'm in the process of raising capital for a Co-GP/LP fund that focuses on providing small balance investments of $500k - $5mm. I've advised my investor pool that we'll also be providing bridge, pref. equity, and mezz to generate additional yield that has a quicker revolving door. I'm using their balance sheet to obtain the warehouse line. My fund keeps the origination fees along with a 125 bps on the yield spread.

I probably fall into your category of small entrepreneurial lenders. I manage a debt “fund” that offers bridge loans and subordinate financing with loan amounts under $3 million. I put fund in quotes because we’re not technically a fund, we essentially have unconditional backing by an extremely wealthy individual and use them as a line of credit. After a couple years under our belt, we were able to get a line of credit via a local bank with a much lower cost of capital. Together, with some of our own capital, we have a nice portfolio that only takes a couple people to manage.

We initially started our business focusing on debt placement, but knew we had to become a direct lender to really build a business.

PM me if you have any questions.

Your question sounds like you're looking at it on a deal-by-deal basis. For debt you need to raise a fund to have access to capital, you're not going to have time to go out and raise one at a time.