Debt or Equity - Based on Difficulty Starting Out

Curious what everyone thinks here as I got into a discussion with a colleague based on the learning curve when starting out in real estate. Sure, real estate isn't rocket science, but consider it from someone just starting their career out with very minimal exposure/internship experience in the industry. Do you think debt or equity is more difficult for someone starting out to quickly pick things up and provide value for the team. My colleague started at a debt brokerage on an institutional team working on all product types and I started out in REPE as an acquisitions analyst in which I worked a little bit on every major property type with a focus on multi. Both of us had little experience and both felt that when we started out, we had a lot of hurdles to get over and learn. 

Thought this would be a fun/interesting topic, let me know what you guys think.

Comments (14)

CREnadian, what's your opinion? Comment below:

Equity is without question more difficult - you have to create and believe in your business plan, figure out equity structure, understand both upside and downside intimately, raise equity, etc.

Debt is all about downside protection and is a much simpler process. Maybe if you're at a debt fund it's a little more complex but at a senior lender that's not the case.

apricots, what's your opinion? Comment below:

Disagree. Sure maybe not for local or regionally senior bank lenders. Debt funds/bridge groups are running same analysis … literally UW the biz plan (tbh obviously.. confused this isn't understood unless you're a core guy) and also building / reviewing your equity models and all assumptions. Same work exactly. One side note - debt fund will have 10-25x the deal flow. A positive for a new guys hitting the desk, etc

The EBITA addback, what's your opinion? Comment below:

Equity hands done. I've done both- no comparison. And RE debt is the easiest by far with the least amount of skills needed. 

Like the unadjusted- only with a little bit extra.
  • 1
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KirklandAlways69, what's your opinion? Comment below:

If you're the general / operating partner, equity is harder as you have to dive in deeper. 

If you're an allocator of LP equity, it's basically just debt that's in a different place in the capital stack. 

  • Associate 1 in RE - Comm

From someone that comes from brokerage. Do you think that starting as an analyst in D/E placement/structured finance (whatever you want to call it) or as an IS analyst would be tougher to learn given no/limited experience prior?

CREnadian, what's your opinion? Comment below:

Probably structured finance - IS guys underwrite a property down to NOI and all they care about is upside and the rosy numbers. They don't learn how to analyze downside in a deal or anything below the line. If you get on an absolute top IS team that might change my answer because those guys generally know what they're doing, but the vast majority of brokers are just sales guys who don't really get it.

The structured finance side you're at least getting exposure to the whole capital stack, underwriting stuff down to net cash flow and through a waterfall if you're placing equity. You need to understand a deal the same way an investor would in order to pitch it for equity placement.

  • Broker in RE - Other

I started as a debt broker out of college with no prior experience. I would say the learning curve from my experience has been a bit steeper than IS. Though I've never been on the IS side, you're selling one product and all your time is spent learning that product. Yes there are always new things to learn, but if you're doing the same product type day in and day out, I'd imagine it's a much quicker learning process. Whereas the debt side you need to know a bit about every product type (though not as granular as IS) and you also need to understand the lender perspective and programs. I would say there's more information to know and understand on the debt brokerage side - not saying it's more difficult. You can make a shitload in either, so it's really what you enjoy more. The joy of debt brokerage is you can do deals anywhere in the country while you're traversing South America given that it's not fully location based. I wouldn't say you need to be smarter to be a DSF analyst vs IS analyst, it's honestly just wherever you get a job. The annoying part for me and many others I started with is how long it takes to get an understanding of the business. You learn by repetition and doing the same job over and over. That's why the senior brokers always appear to "know" everything. In some cases sure, but it's because they've already done their 10000 fuck ups that you're set to make in the near future and learn from.  

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  • VP in PE - Other

I do both. Agree with others who have said debt and LP equity is very similar. End of the day, you're assessing the sponsor's business plan and investing in it (yes, debt is an investment). Whether you're in the debt or the equity, you're still checking the same points.

Where equity is different to debt is if you're the GP given you're the one unearthing the deals and putting together the business plan. I worked in this previously and it is far more educational as a junior than lending / LP equity as you need to think through the business plan before locking it down and presenting it to lenders / LPs.

People (typically juniors) on this website put equity on a pedestal vs debt. I'd place far more importance on risk profile of the transaction. If you're investing in a new built single let property on a 25 year lease to a great tenant, you're likely doing roughly the same analysis whether you're the debt or equity. Similarly, if you're investing in a struggling hotel which will be repositioned to coliving, you'll be doing roughly the same analysis too but you'll learn far more than you would in the first example. If we were hiring someone all else equal I'd take the person with experience lending into value-add / opportunistic transactions over the person investing into the equity of super clean core transactions.

Heartcore, what's your opinion? Comment below:

To VP above -

100% agree. I also have experience on both the debt and the equity side and your reference to risk profile is the crux. Take infrastructure projects as an example. There have been many examples of MAEs during construction and/or operations, which led to the base case refi or business case not being met, the equity check just being written off, the fund manager walking away and handing over the keys to the debt guys, who were just expected to gobble up the cap structure "thanks" to leverage. All the while, the debt guys were prepared for this kind of situation in their outcome set and put in place strong structural mitigants in docs and the structure overall, having done extensive DD on the technology, contractors, etc. so that in the end in spite of this outcome the paper is still bankable and the project can continue to be operated efficiently. Or, I can flip it the other way and say that plain vanilla LevFin just churns out paper for LBOs and barely does any analysis due to volume and margins being run down to the bone. On the other hand, the equity tranche does obviously really deep, fundamental DD because its IRR rests on squeezing the absolute maximum out of a TargetCo and prettying it up for multiple expansion X years down the road. Like you said, it's all contextual and this pedestal is a dick measuring fantasy.

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  • VP in PE - Other

This is the key point re debt. When we're looking at providing a loan, the major question is are we happy to own this if it goes wrong. If we're not we don't do the loan. When you're approaching it with that mindset, one of the key things you're thinking through is how will this go wrong and how will we do prepare for it / derisk it before it happens. Every loan we do is on the assumption we'll be in the equity at some point. We haven't been yet, but all the necessary protections are there in case we need to be, and it means we think about the investment like we own it. This goes back to my point of risk profile, if you're doing clean core investments you're not approaching it from this aspect whether it's debt or equity. Hence why if we're hiring, I'd take a stretch whole loan construction loan provider over a core equity investor all else equal.

thebigragu, what's your opinion? Comment below:

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