Why GP/LP Equity over a Debt Fund?
Why are GP/LP Equity roles more coveted than those with Debt Funds? From what I’ve seen they’re all equally as lucrative, maybe debt funds even more so. I’ve also seen some debt funds consistently producing the same/better returns than some equity shops. Is it just personal preference? More prestige? More interested in the actual brick and mortar rather than the financing, or something else?
It's a WSO thing.... people understand "equity" much easier than "debt", at least that's my opinion. If people actually understood the debt world and debt funds, they would be way more celebrated. Similar thing with stocks and bonds and bond trading strategies, they are wayyyy more complex, and thus fewer do it or want to.
In what sense is debt more complicated? I’d argue GP equity investing is more complicated as you have to really understand the legal structures of a deal you are putting together, ensure it’s feasibility, model and account for cash flow below NOI, among other considerations. On the other hand, most debt investors (generalizing here) are just reviewing and scrutinizing an already put together business plan and solving to a certain yield based on base case or downside case. I wouldn’t say that levering a loan is any more complicated than levering an equity investment.
Well, most of items listed above must be understood by the lender as much as the GP or LP equity... legal structures, cash flow below NOI, etc... that's part of underwriting/DD for loan.
But, I wasn't talking about any of that (since it's more or less equal)...... I was talking about the actual operations of a debt fund vs. an equity fund! Leveraging the equity base and managing spreads, trading loans, and using dynamic hedging, etc. Plus, diversification of maturities as well as standard asset diversification metrics (prop type, geography, etc.). Warehouse lines and other LOCs vs. bonds/fixed borrowing... a lot of risk curve decisions being made by that debt fund (or bank for that matter, not all that different at the holding company level)...
By contrast, an equity fund gets to use leverage at the property level (tbh, maybe they lever, just not aware of that, seems property level debt more efficient) and thus push all that stuff off on the lender. Also, an equity fund gets to deploy and forget about it, then when recap occurs... they distribute and re-launch a new fund! Debt funds can recycle capital and operate more like a hedge fund (than a private equity fund) and thus have more interesting/longer lives.
Securitization (CMBS) is whole other thing.... but that's more sales/trading to bond investors, but same idea.
Are you kidding? Duration and convexity make levering a debt instrument (or portfolio) tons more complicated!
Lender here and could not agree more
How many repo / LoL facilities have you negotiated? I'll take bog standard development financing raise any day of the week over the pain of a repo / LoL facility. Levering an equity investment is near cookie-cutter once you've done it 2-3 times.
Huh? Legal documentation and structure are the core of leveraged finance…
I would say they’re coveted because equity investors tend to enjoy the upside and we all hope to, one day, benefit from this upside.
Want to piggyback off this one. Also real estate specific.
- Equity has more upside and better carry structures. Typically 20% carry vs. 15% for debt. So two 1 billion dollar funds, the equity fund doubles, there's $200m of carry. The debt fund makes 0.5x, there's $75m of carry. The debt fund can't really outperform (for most debt funds, some are more opportunistic, equity like funds). An equity fund can 2.5 or 3x
- The "investment acumen" of debt is typically lower. It is more about volume. I think this gap has shrunk in recent years. As prices have come in PE funds are just choosing platforms / sectors rather than single assets, and saying hit the go button and acquire in volume
- Debt is a race to the bottom on pricing and has been for a while. Again, I think this gap has been shrinking in recent years.
- Has nothing to do with choosing a strategy, but generally, the quality (from an intelligence / analysis perspective) in debt is a huge range. Since you're 70% LTV, if you're doing vanilla stuff, you really don't need to be that smart or know that much about real estate. The really smart debt guys really understand the ins-and-outs of structuring.
- Easier to go from equity to debt than debt to equity. Not saying this is right, just is what it is
When I saw the title I thought this was another thread by that whatmyname kid.
Don’t disrespect me like that
Well it also depends on carry structures. At a debt fund, depending on the arrangement, for example one may get deal specific carry in which case the payout is very visible from a quantum and timing perspective. Compare that to an equity fund where 1) you may or may not have any depending on fund performance (single fund, single asset has highest risk if the sole asset bombs, google "Pershing Square's "Target" fund - i.e. Target the retailer). So if you're at a good shop that consistently does great small to medium ticket debt deals at high frequency, the payout profile could look more attractive depending on what you're looking for.
If you brag about making >$300k originating 60% ltv loans you’re a f****t who probably went to Fordham
$300k associate pay is higher than virtually all equity funds. Why not brag about it
No I get it, you have to brag about the money because you went to Fordham and you're a disgusting zero-value-creating parasite on the economy that makes people want to vote for AOC
Broad generalization: prestige baby - it has equity in the name which sounds cool, so the monkeys flock to it as they can't think for themselves and follow what prospects on WSO say.
More personally: I like complicated lends but would get bored quickly in a traditional debt fund as it's somewhat commoditized. LP equity is interesting as you're seeing the full deal life cycle and have some input into it (key commercial decisions, negotiation of major docs etc). GP is definitely what I've found most interesting as you're creating and delivering the business plan.
While it's important to check returns of a fund you're joining to make sure it's trajectory is still solid, I wouldn't let this influence what part of the cap stack you want to be in. Very different role lending whole loan at 75% LTV and using repo to create low double digit returns vs. say a value-add equity investment generating same returns. Choose what you find interesting.
I know more idiots in equity than I do idiots in debt.
agree, although i will say the bottom of debt guys is much, much lower than the bottom of equity guys
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