REPE vs Re Credit
Hi monkeys,
Curious to hear your opinions between the two, and why REPE is typically seen as superior to RE Credit to work in. Thanks!
Trending Content - Real Estate Forum
Career Resources
I wouldn't say one is superior to the other. Both make great risk-adjusted returns and can lead to very lucrative careers. REPE roles are going to make the headlines of " ___ bought this $XXX Million dollar deal that's Class A and blah blah blah" whereas Private Credit roles are less eye catching. REPE are the eternal optimists and looking for any and all possible upside (with limited downside) and Credit is looking at worst case scenario so the Sponsor can pay back the debt service and principle and the upside doesn't really affect them as much. I will say that people tend to want to go "shopping' for new deals on the equity acquisitions side because you get to find a shiny new deal that has a ton of potential in their eyes so it becomes that coveted role. These are just the opinions of person on the equity side, I'm sure there are very differing opinions across the REPE and Credit spectrum. If you are curious of both, I would recommend interning at both and finding out for yourself.
This pretty much sums it up - REPE isn't "better" it's just sexier because its the side making the headline deals, while credit is financing them.
I would argue credit is actually more intellectually stimulating if you're at a debt fund because you're doing leveraged lending on high risk deals so you need to understand the equity piece almost as well as the REPE guys but also understand your downside as the lender, credit structuring, etc.
Related, but I think opportunistic RE credit (hedge fund/debt fund shops) is fun. For context I work in a REPE shop but can/have invested across the capital stack in higher yielding credit (bridge, mezz, b-notes, CMBS subordinate bonds). In the limited experience that I have working on these investments, I found them to shorter fuse/faster moving, which ultimately is a good fit for my personality type. These opportunities also tend to be a lot more hairy/complex in nature and you really need to have a good grasp of the collateral and your ability to take back keys in the event of default.
But again everything boils down to fit -- REPE's fun because you're crafting a business plan for an asset. You're thinking like an owner and you're constantly trying to find ways to add value to make returns pencil. On the other hand, RE credit is a lot more focused on downside mitigation. Things like negotiating control and cure rights, sizing to ensure you have enough credit enhancement, adding more structure to the loan to reduce risk of non-payment etc.
As someone who takes the other side of this. I personally don’t enjoy credit. I find it pretty boring because you don’t need to think through property operations as deeply. As a lender, all I care about is creating a structure to make sure I get paid back. Once you’ve seen a few credit deals, unless you’re at a highly structured lender, you’ve seen them all. So I found it boring. You could say the same about equity. I just prefer dealing with operations and how we will operate the asset. My experience with credit too was that you need to work harder for the same pay. What do I mean by that - well you manage credit relationships to put money out the door. This means that you need to quote business for the relationship even if you don’t actually want to lend on the deal. Which creates more work. Which means you underwrite and quote everything that comes in the door. Whereas in equity, if you kill a deal for a myriad of reasons, you just call the broker and don’t bid. So there is less spinning you wheels in my experience in equity because brokers aren’t your client base but borrowers in the debt business are. And you need to always be there for your clients even if you don’t actually want their business - you need them to think you do.
Considering moving to a high yield debt fund from industrial development. Do you still recommend it? Warehouse lines, repo lines, stretch loans, acquiring distressed debt, all of this is very foreign to me and I think it’s great knowledge / experience to have regardless of which direction I move later. Got a decent feel for industrial and a bit bored now / seeing our pipeline slow down a bit.
I mean. I don’t like lending so i don’t really recommend it to anyone. But if you think it’ll be interesting for you. Go for it.
Was your lending experience at more of on opportunistic debt fund or rather a lender type that generally plays in safer tranches/slices of the capital stack? I'm wondering if there is a palpable difference between the two when considering engagement/mental stimulation/overall level of interest. I.E. would being on the debt side at an Oaktree/Starwood/etc. be more interesting to you than say at a LifeCo or a more hands-off/less opportunistic capital provider?
Worked at a life co doing senior/bridge/construction. So I was not doing the debt fund deal but was still playing in structured lending. Either way - I just don’t find it interesting. So for me, I would not do it. But that’s me. I like property operations and don’t like doing a repetitive day. That’s why I like and work at a developer now.
Echo the same sentiment wholeheartedly. One of the main reasons I am transitioning over to equity is because I hate how iterative the debt side is. Like literally, we’ll run perpetual analyses just because the borrower wants to see 12 different scenarios but only one scenario is the obvious choice. Also, like previous person said, you can’t really say no on the debt side. Even MDs are not going to stand up to a client even if it makes sense to. You pretty much acquiesce to the client on almost everything. I have even seen deals where we UW to borrower’s budget when honestly I did not agree with that approach at all. But at the end of the day, debt is a commodity. What one lender won’t do, another will.
REPE returns are much higher than lender returns. In theory.
There’s some nuance to this. Development returns are higher than value-add/opportunistic acquisitions returns but REPE pays significantly more. It’s because you can churn out more acquisitions whereas developments take a lot more time and effort. Similarly, you can pump out loans quickly and with way fewer people. That’s why top debt shops will pay similarly to top equity shops.
Saying this as an equity guy.
As someone who spent a bit over a year in REPE and after that transitioned to a real estate debt fund where I've been for the last 4 years, I think I can chime in on this.
The equity side is as people have already mentioned a bit less structured, a bit less repetitive. Its about looking for upside and trying to see where you can find growth. It is the more 'visible' side of the deal as you're the person doing the actual deal, the credit people are just providing your deal a mortgage.
Personally, I strongly prefer the debt side. Because you're that one step removed from the deal, there's less pressure. You're less likely to work long hours as the pressure is a bit less on you to get the deal over the line, its much more relaxed, and I love that. Some hardos seem to revel in working into the early hours of the morning, personally I prefer to get a slightly lower bonus (but still pretty decent) but leave at a reasonable hour so that I can enjoy things outside the office. Credit is all about thinking about the downside, thinking about the things that can go wrong and how you protect yourself against that. I actually quite enjoy that from an intellectual perspective.
Credit is also more structured. You have procedures to go through, you have documentation and committees. Covenants and terms are relatively standardised, though adjusted for individual deals. If you like structure, then this is where you'll fit in just fine. The other thing I like is that you're much more protected when things go wrong. Equity positions can be wiped out completely, debt will nearly always recover at least something. So if you screw up an investment, your fund/firm/job isn't wiped out by it, you have downside protection. Also with equity you have to live and breathe your deal continuously for the entire hold period, as you'll need to be managing it, carrying out asset management initiatives, etc. With debt you make the loan, and then you park it and forget about it (unless something on it goes wrong).
Credit is a lot about saying no. Someone else commented on this thread that "you can't really say no on the debt side". What kind of an irresponsible shop are you working at? Your job literally is to make sure your investor's money doesn't go into something stupid. We never believe the sponsor business plan. If you're telling me your cap rate is 3.5% but SONIA before you add any margin is at 4.0%, well then that just makes no sense at all. If the ability of your project to pay interest current is fully reliant on future rental growth, then you're asking for too much leverage. The vast vast majority of funding proposals we see we kill right off the bat, relatively few make it to the stage of running full models and negotiating terms.
Qui sint numquam vel est. Reprehenderit error cumque animi ex quo soluta reiciendis. Magni aut et ea illum facilis facilis ipsum. Iste aut excepturi ut dolor.
Deleniti quia magnam alias aut. Amet quo nihil laudantium cum exercitationem. Vitae beatae qui voluptatum corrupti sunt ut.
Ullam exercitationem amet suscipit quasi. Enim tenetur velit rerum consequuntur atque debitis. Sit rem quae tempore dignissimos repudiandae nihil alias aut. Et ipsam in eum aperiam.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...