Debt Side in Given Current Market
Currently I’m an associate for a large asset management firm, working as a generalist - mostly asset management, development and portfolio, with some acquisition work.
For the past year or so, I’ve really wanted to move into an acquisitions/development specific role to get more experience working on transactions from sourcing —> DD —> closing. While I know I’m perfectly qualified, given the transactional world - opportunities are slim to none right now.
I’ve been approached for numerous debt roles, as a lot of firms are expanding their debt platforms given the market and enhanced opportunities in the private debt world. While I consider myself more of a brick & mortar real estate person,I think that over the next 2 years, debt will be a very lucrative place to be. But I don’t know if it’s somewhere that I would want to be for my career.
Do you guys think that going to the debt side would hurt my chances of moving back over to the equity side later on? Part of me thinks that it might move me further from an acquisitions/development/generalist role for a true opportunistic firm, while part of me thinks that it’ll make me more valuable to really have seen all sides of the business.
Anyone else have recent thoughts about moving to the debt side lately? Think it would be helpful, or not really?
I wouldn't move to a balance sheet or agency lender, but if you could find a spot at an opportunistic/high yield debt fund, then it will just come down to how you spin your experience when you want to move again.
Debt people that are doing construction or opportunistic lending have to be experts in the bricks and sticks as well as financial engineers. I know most people think that lending is easy, but at true investor focused funds, while we don't formulate the business plans (unless there is a workout/default situation), we do check/test every part of the business plan before we invest.
The modeling is very similar to equity folks and if you are leveraging your position, you actually have to sell the business plan like a capital markets person to engineer the stack.
Agreed - a shorter stint isn't going to hurt if it's at a debt fund that's doing high risk mezz/bridge loans and likely on a leveraged basis themselves.
The funny thing is you don’t develop the business plan at LPs/REPE funds either; you rely on your operating partner, drop numbers into your own model format and back off assumptions — basically the same thing that you do at a debt fund. At a debt fund you see a lot more volume than on the acquisition side, but the real estate analysis is a little more superficial and fast paced (negatives in my opinion). The deals that you see are usually realistic projections / business plans because they’re the sponsor’s, which is better than sitting on the acquisition side where all of the broker numbers are bull shit and the operators (at least the bad ones) are just trying to sell you on rosy projections. I’ve done both acquisitions and debt fund roles. Both have their advantages and I’ve enjoyed both. But don’t fool yourself into believing that acquisitions is a panacea of sophistication and better compensation. You can make just as much money working for a debt fund, while learning more and building broader relationships with groups who you wouldn’t otherwise meet (like competitive repe funds and senior co-lenders). Real estate is all about the relationships at the end of the day, and debt is the third leg of the stool for being a successful well-rounded opportunistic investor. It’s critical to understand in depth if you want to be good.
Curios why not a balance sheet or agency lender?
Agency only does multi, so you wouldn't get the depth of experience.
Balance sheet lenders usually focus on core/stabilized deals, which typically at a bit more vanilla. You arent going to see super complex deals and the mindset is more volume than doing "good" deals.
I moved to a debt fund after a couple years in acquisitions and development. Im hoping to move back to the equity side soon, and I think the experience in underwriting debt deals will stand to me greatly. Debt funds really think more holistically about the fan of outcomes, particularly on the downside, whereas I previously only thought about basic downside risks like inflation and cap rates etc.
Whilst I personally find the debt side boring, I have been able to look at so many different transactions across different assets and geographies, and reviewing so many business plans. Usually, when sponsors come to a debt fund it’s because they can’t access traditional debt funding, so there’s typically a few issues with the asset/business plan.
Anyways, I recommend going to a debt fund if the comp is good and you see good deal flow across asset types, as it really sets you up to do well once transitioning back to equity.
Edit: I should also say, the modelling is nowhere near as complicated as the equity side. We typically take the sponsors model, adjust a few assumptions to stress, and build in about 8-10 lines of debt workings and that’s it. The real challenge is understanding the downside risks
Interesting that you don't build your own models. At the debt funds I've worked at, we have our own templates and always build one from scratch. We look at broker/sponsor models for base assumptions, but would never rely on them.
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