How often, if any, do REPE firms leverage their own equity contributed towards LP pieces of deals? For example, a $10mm LP contribution towards a value-add deal given to the sponsor where a firm might only contribute 5mm equity/cash outlay but backlever the remaining 5mm at a low rate through subscription/line financing to fill out the whole 10mm piece of "equity".
This is pretty common at PE shops (non RE related - think industrial,energy,etc.), and was curious if this takes place at REPE/RE focused investment shops.
Appreciate the input.
Most of the major REPEs have begun to acquire assets using subscription lines first and calling LP capital at a much later time period in order to juice IRR. The benefits being: (1) Higher reported IRR when fundraising for new funds and (2) more promote to the fund itself.
Appreciate the clarification on that.
Now how often, if any, do REPE and RE Investment shops actually utilize leverage (line of credit, RCF, or some sort of leverage vehicle) towards their equity LP position throughout the whole lifetime of the investment holding? Think same example as above. Benefits include juicing IRR, increasing initial capital base allowing for more deals, larger deals, diversification, and the various other benefits of using leverage.
I don't see REPE firms that utilize pension money, for example, doing this, but assuming more opportunistic firms or more aggressive family offices maybe?
Obviously, adds a lot of risk to the deal....as the equity piece you're already pretty subordinate/highest risk...so a bankruptcy to the deal(s) will be very ugly.
Wouldn't one say that a Fund (e.g. Blackstone) is leveraging its equity via it's own LPs (SWFs, Pension Funds, UHNW Investors)? Similarly to how a GP (at the deal level), in this instance a real estate operator is levered into a deal by an LP, in this instance Blackstone.
If you're asking, are the Blackstone's of the world levered into their real estate deals, I would answer, yes - in the form of subscription lines. If you're asking are they levered by a mechanism beyond subscription lines, I personally am unaware of this.
To answer your question, REPEs "Lever" themselves by:
Receiving LP funds and promoting off of those LPs.
Using subscription lines to juice returns are provide even more promote to the fund.
Disclaimer - I only have experience at one megafund so perhaps things are different elsewhere.
Typically, Warehouse Lenders will ONLY lends against extremely creditworthy LPs. The Lender is collateralized by the uncommitted capital of the LPs and will pull back the warehouse line if and when they feel that they are not properly collateralized.
Definitely see GPs doing this where they will close on the property using a subscription line, or if they are in a JV they will recycle cash from other properties and call for capital in later periods. This is pure financial engineering where you can really fatten the IRRs and just obliterate the pref. and get into promote. However on the LP side (REPE), this is almost unnecessarily aggressive given that the property is already going to have debt on the property(assuming). Essentially, you are going into mezz territory with this kind of financing.
Worth noting that many fund docs contractually limit the amount of time a GP can keep a deal on the LOC before calling for capital. For example, we can only do it for 6 months.
I've seen and heard of the following: acquiring with a line in place of senior loan and using it as a bridge using a line as additional leverage until being able to refi/uplever the senior keeping some amount of additional leverage in place through the entire life cylce of the investment
Maybe I am looking at the question too high level, but the answer is: usually.
You’re talking LP investments. As an LP and few different RE funds, I use unsecured lines of credit to fund most of my capital commitments. Therefore I ‘back lever’
You also asked about the funds themselves (I.e. the GP) funding a portion of their commitment with debt. This is typically a group of employees/partners who have committed capital to form the firms GP.
The firm will put up its balance sheet (unless it is a family shop, etc.) to back your personal credit capacity in getting debt to back-fill the majority of your commitment (all personal recourse, naturally).
Appreciate this info. The first few sentences of your response is what I am seeking.
PM'ing you.
Why would a bank give you an unsecured line of credit? Isn't it more risk for them? Why wouldn't they want to secure a lein on the actual asset / company you're investing in?
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