Principal Side (REPE, Developer, Owner) vs Debt Fund
I’ve seen varying arguments for the future of real estate such as a quick drop in values this year/next year vs a much longer bear market due to rising rates and negative population growth.
Hypothetically, assuming the latter is correct, in terms of total compensation, would you rather be working on the principal side or for a debt fund doing mortgage lending. Many firms have both such as BX.
If total volume falls in the real estate industry (smaller funds and smaller transaction size), I’m wondering which gets hit harder: the owners or the lenders.
On one end, the owner probably has less capital and it’s assets are worth less. On the other, the lender’s loan sizes are smaller due to smaller transaction volume. However, with higher rates, the lender can earn more on their loans.
Reason I’m asking is because I’ve always had the goal of transitioning into REPE acquisitions or AM but now I’m having second thoughts with how the economy and market has turned.
Dude, it's not gonna impact comp at your level.
Yeah no shit but how about at the VP and above levels
Then REPE always has 169% chance of higher comp at the VP+ level.
My man, it's real estate. If you're evaluating these things in a 12-24 month timeline, you aren't thinking about it correctly. Real money comes from asset appreciation and income, not flipping properties every time the market ticks up another half point.
More to the point, there is always more money on the sponsor side over the long term, whether that is at a fund or a developer. I guess if you're 32 and thinking about where the biggest potential bonus is going to be this year or next, it might be relevant, but even at that point, the real goal is getting carry, which has a 5+ year horizon to be paid. If your so junior that you can't think of that yet (which isn't a bad thing obviously, it's where we all start) then whether or not your firm is going to mark down the value of their assets by 20%, or do 20% more/less business, or whatever, is completely immaterial, since your comp is going to be fairly fixed.
I'm just going to say this.
This industry has becoming more and more institutionalized. There are smaller operators, making money, and you can potentially make more on the principal side of a smaller developer or owner. BUT, for a junior "guy", the chances these payout big are small, even though every now and then you see someone on here at a developer with 5 YOE making 300k with participation.
If you can go for the big name company first, if given the option. Work like a dog for the first 5-6 years of your career, and watch the opportunities unfold.
Agreed. As things get more & more institutionalized, the small operator / merchant build model comes under more pressure. Those outsized promote checks get less and less likely, especially for juniors, and especially in a high or rising-rate environment.
A lot of this is going to depend on what kind of assets you are talking about. A high yield debt fund returing a 12% levered return pre-pandemic is more like a 18% right now just because of the sofr curve. Turbulence in the market means equity funds are down, but levered debt funds are generally up.
Contrast that with core, fixed rate loans, which is more of a fee/flow business. So less transaction volume means less fee generation.
Equity will always have more absolute ups and downs. Debt will always be more tempered.
But if you can get to a high yield debt fund, you get the best of both worlds.
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