Credit vs. Equity investing
How different are real estate private equity vs. real estate private credit investing? Pretty open-ended but why do people prefer one or the other?
Which would you rather build a career in?
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I prefer equity because you have to deal with the details of building operations. While many people may tell you if you are trying to switch from debt to equity, they aren’t the same, it’s the most bullsh*t thing I’ve ever heard. The only difference is that on the debt side, you care a bit less about capex and so you don’t scrutinize it as hard.
As someone who’s done equity investment (core/core plus/ value add/ development) and debt investment (senior, bridge, construction, mezz,) and pref equity, it’s all the same. Literally you go through the exact same process just have different drivers of your thought process as you’re in a different part of the capital stack.
Personally, I prefer equity because you deal with the operations and capex items. You’re figuring out what makes the property tick. When I was a bridge lender, and was lending 65% LTC with future funding, if leasing didn’t happen, I didn’t really care because my position was safe. So like-it’s just a different thought process.
Agreed... Done LP investing and Debt Fund originations... it's the same underwriting for just about all of it. As you mentioned you're more concerned with the capex on equity rather than just a plug from the PCA. You're also doing waterfalls and returns that you may not be doing on the debt side depending on how you're structured (though let's be honest the model helps filter through, you just need to know mechanics of it to be able to switch deal by deal). Otherwise, opex is still opex, RE Taxes are still RE taxes, Other income still other income etc.
No. Not sure where you worked on debt, sure there are different scopes for eng/Reno budgets. But you’re digging in just as much, often more… especially today to ensure deal is structured correctly. Debt funds are HY yield bridge lenders (most often), the literal reason you’re getting their debt is to execute a biz plan… so renovate or lease up an asset (leasing dollars). So dumbing it down, most important aspect in the deal is UW the biz plan / thus ensuring what the capex work is, if we’re capitalized, and structuring docs accordingly. Also repe in most cases rely on the gp for the boots on the ground execution (obviously). Saying they’re closer to the deal is meh not truly accurate. You run excel models and read mkt reports … and engage vendors for their opinion (same as debt).
If talking a PE/pc sponsor credit fund .. effectively same work. It’s HY debt. Half of them do equity and pref/mezz in their funds too. Literally same DD. Personal decision .. more flow in credit more structured aspects. Personally credit / structured fin guys are smarter (across the board in finance… pc, bond traders, etc vs their counterpart ). I'd note, we're in a credit mkt for the foreseeable future (rip bull run)… chatted w MF repe principal yesterday … not looking hot .. can't even raise lol. Ppl on this forum love equity bc it's the riskiest/highest yielding etc etc… until its wiped (today). Yes I'm in credit.
I’d rather work in debt. Have worked in both debt and equity, and currently work on the equity side. Easier to get deals done, more deal volume, and comp that I’ve seen is the same or higher than equity cash wise
Credit vs. equity is too simplistic of a debate. I've worked in a large developer and now I work in a REPE fund which invests across the capital structure. There is pretty limited difference between credit and LP equity. DD is pretty similar and the operating partner is driving the project forward, the only significant difference is on the LP equity side I'm involved throughout the project lifecycle and still signing off on key decisions. If you're working with a competent operating partner, you'll typically always be aligned on the decisions to be made and their analysis to support the decision is clear.
Where it gets very different is on the operating partner side. You're creating the business plan, getting others to buy into it, and then delivering it. You can spend years unlocking opportunities before they finally come to a position where you're bringing in equity and debt. Once you've capital in, now you need to deliver the business plan and are running entitlement / capex / leasing / exit etc workstreams depending on what the project involves. Very different workstreams to underwriting something and taking it through IC.
If you want to be on the investment side I would recommend an opportunistic REPE fund / special sits fund which can do across the cap stack. Typically no shortage of opportunities as there's always some form of dislocation which creates opportunities, we constantly pivot depending on where we see the most attractive returns.
I'm happy I've spent a few years on the investment side, but I definitely want to go back to operating partner side for long term. Unless you're a deal person, investment gets pretty boring and repetitive once you've worked on enough opportunities. Operating partner is a lot more varied and intellectually stimulating as long as you don't get pigeonholed into a particular role.
They’re about to be the same thing for a while
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