To all the debt guys: are you actually doing deals right now?
Working in originations for a mid-market debt fund in LA/SF/NYC and while we’re seeing a decent amount of flow, it’s been near impossible to get deals signed up, either because our cost of capital is too high, falling short on proceeds, etc.
Are any other lenders out there experiencing the same thing? Part of the problem is that we’re an open-ended fund, but have minimal cash at the moment… the current fundraising environment certainly isn’t helping the situation.
I really like the team I work with, and could see myself sticking around long-term, but starting to feel like I need to leave to get more reps in since I’ve only closed $100M since starting 18 months ago.Would love to hear everyone’s thoughts on how to best move ahead!
I don’t anything about working at a debt fund but I know acquisitions guys who haven’t closed a deal in 2 years. $100mm in 18 months doesn’t sound too bad for this environment… as long as that is enough volume to keep you employed.
Based on the most helpful WSO content, the challenges you're facing are not unique in the current market environment. Many lenders, especially in the mid-market space, are encountering similar hurdles due to a combination of factors:
High Cost of Capital: As noted in various threads, the cost of capital has risen significantly, making it difficult to compete on pricing. For example, mezzanine debt is often priced at 12-15% interest for higher leverage, which can deter borrowers unless absolutely necessary.
Falling Short on Proceeds: Banks and traditional lenders are pulling back, often capping leverage at 60-65% LTC (Loan-to-Cost), compared to pre-crisis levels of 80%+. This leaves a gap that alternative lenders like your fund are expected to fill, but the elevated pricing and tighter underwriting standards make it challenging to close deals.
Liquidity Constraints: Open-ended funds with minimal cash are particularly vulnerable in this environment. Fundraising has become more difficult, as LPs are cautious about committing capital amidst market uncertainty. This is echoed in threads discussing the struggles of funds with less seasoned teams or those that grew rapidly during bull markets.
Market Dynamics: The lending environment is described as defensive, with banks focusing on relationship lending and being reluctant to extend loans without recourse. Multifamily and industrial properties are still in demand, but even these sectors face tighter lending conditions.
Suggestions for Moving Ahead:
Stay the Course (If Possible): If you value your team and see long-term potential, consider weathering the current storm. Market cycles shift, and being part of a strong team during tough times can position you well for future opportunities.
Expand Your Skillset: Use this time to deepen your expertise in underwriting, structuring, and relationship management. This will make you more valuable, whether you stay or move on.
Explore Other Opportunities: If deal flow and experience are your top priorities, you might consider transitioning to a platform with more liquidity or a different focus (e.g., direct lending, rescue financing). However, be mindful of the trade-offs, such as team culture and long-term growth potential.
Network Strategically: Engage with other professionals in the industry to understand how they are navigating these challenges. This can provide insights and potentially open doors to new opportunities.
Ultimately, the decision to stay or leave depends on your career goals and risk tolerance. If you're looking for more "reps" and immediate deal flow, a move might make sense. However, if you believe in your team's long-term vision and can afford to be patient, staying could pay off as the market stabilizes.
Sources: Troubled fundraising processes, Mezz Debt vs. Traditional Debt Financing, Alternative Lenders & the End of Risk Taking for Banks - Opportunity or Risk?, https://www.wallstreetoasis.com/forum/real-estate/what-are-your-big-problems-right-now?customgpt=1, https://www.wallstreetoasis.com/forum/real-estate/state-of-the-cre-debt-markets?customgpt=1
Is ded
Bump - can any other lenders chime in?
This thread is showing up in HF forum. Try the RE or Credit forums.
GSE lenders are busy. Fannie and Freddie have had record inflows and signed apps past few weeks. The business model is set up in a way that you can sign up 5 billion in a week.
Yeah I think that generally the debt fund business is slow since bridge deals don't pencil very well right now without making risky assumptions. I'm guessing that in the larger balance space, it's been steadier because spreads have come in quite a bit into the 200s which make it price just wide of perm with the added flexibility of not having pre-pay.
I foresee more deal flow in the near future however as banks stop extending maturing loans.
I thought it was the golden age of private credit? Equity returns with senior security risk? People don't want your 15% hard money? Was it all a pipe dream? Sorry just a dev here annoyed of flipping greedy debt funds the finger lol. Have you thought about....lowering your pricing? Or is senior debt on the most dogshit deals with dogshit sponsors still a much more attractive risk adjusted return?
Others may disagree, but as far as I'm concerned, the "golden age" you're referring to started dying when multifamily and industrial bridge speads started tightening 6-8 months ago. Loans spreads that were pricing at 400 - 500 bps are now 75 - 100 bps lower, if not tighter.
@brosephstalin, you come from a debt background, right? Think it's possible to move upstream to a larger platform, or a more active middle market group without an extensive deal sheet? The one benefit is we're generalist and have done a couple interesting special sits deals, so maybe I can sell that...
Most know what I always preach...if you sell your experience right towards the specific opportunity and utilize your network effectively you can move anywhere in this business. Sometimes it may require more than one jump, in your case I think you can make that jump direct.
Reminds me of when we had a debt fund constantly hounding us to do business with them. We said no thanks and said we're going through our conventional lenders. They told us to give them a chance. After 2 weeks of getting them docs and us waiting on them. They give us a term sheet...45% LTV, 14% rate. Our lenders were are 65-70% LTV at 9%. I told them why should I close with you instead of them. Their response "Well it could take them 65-75 days to close and we close in 45 days. So I then asked "do you think your debt is worth 500 bps more just to close 20 days earlier". He said Yes.
What a dog
That’s wild - sounds like they need to pound sand.
The only way we’re remotely competing with bigger groups is on proceeds. Debt funds are all over 65% LTV paper, but very few groups are going up to 75% - 80%, so I think there’s still a use case for high octane senior solutions.
These morons pushing 300-500 spreads went out sad. Probably had to shift their fund strategy to HRR buying 😂
Definitely slowed down. I work originations in the small balance space (private owners) of RE and we started the year with a large pipeline, but it has slowed down significantly. The overall uncertainty of the market is making investors hesitate to refi or make new acquisitions. The 5 and 10 year yield have also been on a rollercoaster the past few weeks and some of our lenders base their rate on those yields making deals hard to price.
When you say small balance, what are your typical check sizes?
Between $1M-15MM
Pretty dead given volatility. A few deals on hold given the difficulty to price.
It’s slowed down a little bit the last couple weeks with the volatility but we are still on track with goals and have been putting out significant $$. Granted we are one of the larger players and have a very flexible mandate, so can play in a lot of different spaces to get our money out.
Need more context here. Are you at a PC manager, hedge fund, lifeco, etc? Also curious what your ‘25 deployment target is, and what strategies you’re seeing the most flow in
You guys have bad experiences with debt funds. I work on a debt team and every multifamily deal we quote is in the 200s over SOFR range. That gets us to an 11% IRR after back leverage, sometimes more. Closing our first deal this year and about to sign up another.
Surprised it’s taken you over a quarter to close anything with 200s pricing. Why are you losing deals and what’s your conversion rate on term sheet signups?
It’s awesome that you can price that tight, but it’s kind of a moot point without certainty of close.
These are brand new / fully leased properties from top sponsors (think cortland, Greystar, etc) where there’s some concessions that need to burn off. Or there’s a big cash-in on an older deal. Brokers will literally get 20 quotes in the 200s. Less now after markets tanked but still, it’s not easy to win deals, even when quoting 250 over.
We’ve never not performed after issuing a term sheet
We lose deals because some groups price tighter (sub 240), have a prior relationship with sponsor (lower legal costs), borrower doesn’t want to put cash in and opts to sell instead, etc
Closed well over $300mm of debt fund capital so far this year, just myself.
I never understood why some developers bitch so much about rates. Obviously there is a breaking point. But the difference on a construction loan at S+275 (low levered full recourse FDIC bank debt) and S+550 80% LTC non-recourse is 2.75%.
Times a $50mm loan that averages closer to $35mm on the draw schedule…
It’s 800 grand.
So yea, your profits are $12mm instead of $13mm.
If you can’t bridge that gap it’s not a good deal.
This is just misleading. Should be calculating the incremental cost of the additional leverage, not just looking at the difference in spread.
Sure. Let’s hope it still works with mid-high 20s IRR ground up construction.
Because you clearly don't understand how development works.
It's not just the interest cost while you're drawing down the loan over the course of construction, you're ignoring the risk at lease-up/stabilization. Under your example the monthly interest cost for the high leverage loan is roughly 2x more than the low leverage scenario:
Deal size: $70m
Now for the high leverage:
Maybe you account for that in your model, you build out a really robust interest reserve (which will increase your basis pretty substantially, a relatively brisk 8 month lease-up would be a $1.8m difference), but that's still a lot of risk you're carrying. Delays in construction? The AHJ doesn't like your sprinkler guy and fails you three times? The elevator inspection failed and the inspector can't reschedule for three weeks? National Grid delays your gas connection by four months and you can't hit your punch list on schedule? Lease-up slows down for god knows why? You're talking about a $231k hit for every month something goes wrong.
I've had all of those happen to me and have had to do multi-million dollar capital calls because of interest reserve deficits. There are plenty of reasons to go with lower leverage at lower cost.
"I never understood why some developers bitch so much about rates."
Spoken like a true 2nd year analyst who has only ever borrowed money through his credit card. The scariest part about development is the debt service. Imagine being fully drawn down on a loan and lease up/sell out doesn't go the way you had planned and now you are paying 6-12 months more in debt service than you had anticipated or paying it indefinitely until markets come back. The reason you have "never understood why some developers bitch so much about rates" is because you've never taken a risk in your life. Tell you what, why don't you go buy a development project and finance it at S+550, then come back with your asinine comments.
LMM here, pipeline still steady but solid deals are very tough to win. Lots of dog independent sponsors
In my humble opinion construction loans should be broken down into two distinct categories.
1. Loans the sponsor will fix with additional equity if something goes wrong.
2. Loans the sponsor can’t or (more dangerously) won’t fix with additional equity if something goes wrong.
Category 1 can and should get low to mid 200s pricing. Category 2 requires real knowledge and expertise and therefore there are opportunities to make a killing. But you have to be good and ideally have capacity to step in yourself and fix a failed project.
Low leverage bridge pricing is in the mid-to-low 200s for institutional assets right now... are you saying there's no risk premia for ground-up deals?
Correct. A 55% LTC recourse construction loan to legit top tier sponsors with decades of history writing checks is justifiably priced at least as well as a higher leverage non recourse bridge loan.
No institutional top tier sponsors are giving recourse
I'll bite here. A single example of a low-200s construction spread doesn't reflect where the entire market is pricing.
See below for a snippet of Chatham's Q1 '25 credit spreads report where non-recourse construction debt averages to S + 275 bps. We're hearing from the street that ground-up spreads are 40 - 50 bps wider today than 30-45 days ago, so not sure how you think this is a "market" risk profile:
You’re telling on yourself.
275 is about right for non recourse. Low leverage recourse construction is 200 - 250.
How do you define low leverage - 65% LTV seems to fit the bill, no? The fact that bridge spreads START at 225 bps for bridge deals tells me you're off the mark. You're also completely discounting that spreads have widened 40 - 50 bps this month.
No one’s doing shit.
bumping this! where are my debt fund guys at
Agency is busy, lot of deal flow
BS lenders extremely busy all year too.
Are you actually closing deals though, or just seeing a lot of inbound requests?
Closing a shit load. All of our teams. Refinances and acquisition financing. There was a time for a a month or two when agencies were smoking us, but overall…. fantastic year.
Repellat expedita nihil optio distinctio perferendis. Repudiandae beatae aut id eveniet repudiandae qui rerum. In sit eos saepe omnis quos numquam. Cumque qui voluptate voluptatem hic dolorem.
Molestiae quisquam qui est dolores. Laudantium quas impedit sed quia enim. Illo ad maiores eligendi pariatur ratione eos aut. Dolores accusamus voluptate corrupti aliquid voluptate eum aspernatur. Nulla earum nam impedit nobis quo culpa. Porro possimus sed ut ad et molestiae quis.
Quia eveniet deserunt ut et. Rerum quis necessitatibus sit. Tempore consequatur accusantium esse libero impedit illum. Illum non molestiae fuga ex ipsam animi.
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...
Molestiae consequatur enim suscipit aspernatur. Perferendis ducimus perferendis quibusdam qui quod. Temporibus expedita neque cumque unde. Et est id ut voluptatem aut sint expedita.
Velit magnam cumque perferendis dolorem distinctio. Culpa incidunt ratione earum neque modi aperiam odio. Velit vel atque qui ratione quibusdam omnis. Quidem molestiae commodi magnam culpa cum consequatur explicabo qui.
Dignissimos culpa praesentium sed ea. Non rerum autem magni temporibus in molestiae et. Distinctio eveniet alias rem corporis qui. Atque minus minus rem aspernatur.
Unde et qui dolore a asperiores id quo. Quia cupiditate sed qui. Est excepturi ad est aliquid sit rerum sint. Quae sunt quos fugit rem.
Quia blanditiis sequi quibusdam delectus quisquam. Labore quisquam occaecati minus. Porro laudantium minima magni velit.
Consectetur molestiae ut minus quidem dolorum enim quos similique. Reiciendis magni id animi est. Non deserunt sed ipsam qui quod fugiat. Consequatur et dolorem dignissimos nobis perspiciatis odio voluptatem. Cumque optio temporibus molestiae. Rerum ea aperiam a nobis fugiat est expedita.