Are Debt/Equity brokers really necessary participants in the industry?
I have been thinking about the value add of debt/equity brokers.
Let's see what they do and discuss them one by one.
1. They put together the deal OM. Some inexperienced developers/owners need that for sure but most don't. The source info are all from developers/owners
2. They blast the OM to lenders/investors. Some inexperienced developers/owners need that for sure but right now more and more lenders/investors are putting their contact info/underwriting metrics out there.
3. They help field questions from lenders/investors and help negotiate the terms. Some brokers are doing a good jobs on that but fundmentally those questions are answered by the developers/owners and decisions on the terms are made by them. Is the middleman really needed for all those dialogues?
I am not denying the value provided by good brokers. But is it really worth 1% of total debt commitment and 3% of equity? Or is it just a force of habit that perpetuates this?
Depending on the shop it could also just be a time commitment issue. There are plenty of sponsors that might have relationships with banks but the banks could be at capacity on lending to them at their current level of deposits so they need new sources of debt. In this case, rather than have someone on their team cold email a bunch of lenders and hope to hear back, they could have a broker go out and use their established connections to get the best term sheet possible. Similarly, if a sponsor is traditionally syndicating their deals and their existing equity sources are tapped out (HNW/ friends & family) or they need a bigger equity check than normal, they might need an equity broker to find family offices/institutions/HNW investors to cut that equity check. In the future, once you have those established connections, you wouldn't need the broker anymore. But there is a price for connections and to save you time so you can focus on the execution of the deal's business plan.
Thank you for the comments! It would make sense for sponsors to outsource this function to a broker in a frothy market when most of the deals pencil and lots of deals to chase. Right now, 1% broker fee could make or break a deal (in certain cases) and there aren't that much deals to chase..don't see that much of point of retaining a broker for a vanilla deal
If a broker fee makes or breaks a deal it shouldn't be done. I'm on the debt/equity placement side of the business and I find right now Sponsors need us more than when times were good. This is primarily because Capital is more scarce and most banks these days are requiring deposits. I will say that the debt equity brokers that have life insurance correspondent relationships are going to be busier as this bucket of Capital is still active and by nature does not require a deposit relationship. When time are great like 2021 and you own multi in a great location then by all means go to your local bank. On that note, there are plenty of jacked up deals that have a higher success rate when a debt broker conveys a story to relationships they've built over years or decades.
Is it very tough to have a life insurance correspondent for brokers? I mean is it like only selective brokers can get that status?
The big shops have them and there are smaller / regional mortgage banking shops that have them as well. Having the correspondents is one thing, being able to have them pick up the call when you ring is another.
For reference, Marcus and Millichap does not have it because Life Companies don’t trust them to slang their products on their behalf.
but once a sponsor uses a mortgage broker for their debt, what stops the sponsor from going back to that same lender the broker sourced as a repeat customer? how does the broker protect his client moving forward? is it industry standard to keep paying fee to use the same lender?
Most Life Co's (debt side) respect that if a broker brings them a deal and they do it, they to protect that relationship going forward. It gets tricky when the sponsor uses multiple other brokers, then usually the life co just shrugs and says "let the sponsor decide which debt broker to use". Banks are a very different story.
It is often contracted that the broker gets compensated for multiple uses for that relationship over a period of time. After that the sponsor owns the relationship. That is also part of what you are paying for in that fee.
You assume people KNOW the contacts. There is a reason why these people exist. If it was just easy the job wouldn't exist. Guess what? Reality dictates your understanding is incorrect. Also these brokers are scale factors for sponsors. Would I pay 3% for someone to 10x+ my network? Yes. It is an easy answer.
Completely agree.
You're looking at it from an analyst's perspective sitting in front of a sources and uses table and thinking that it's that easy to just remove these costs. Different deals require different types of debt and investors, it's not as simple as just putting together an OM and blasting it. Try putting a deal together yourself and you'll see.
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