Using a Line of Credit / Personal Loan to Invest in Fund?
Hi all.
I have a question that I was hoping someone more senior could help me understand. I am an analyst looking to switch from lending to a REPE opportunistic role.
I was told by an older relative who works in traditional PE that some companies offer employees (maybe even at the associate level depending on the size of the firm) a line of credit so that they are able to put more capital into their company’s funds.
How does this exactly work? If your company isn’t willing to do this, what banks will provide this opportunity? What do they charge in terms of interest? What type of leverage can you utilize?
Some of these companies I am interviewing / applying for average 20-30%+ Gross IRR’s for the last 3 decades. Seems like you would want to borrow as much as possible.
Am I thinking about this correctly or can someone please help explain what I might be misunderstanding or just explain more in general? Seems very interesting to me.
Bonus question. Does anyone at these companies take in capital from family and friends and give them access to above-average returns, but then take some personal carry from the pie? Or is this just a shitty thing to do? I know a fair number of very, very wealthy families that really like me, so this seems like an intriguing idea for the future...
Thanks!
Not an exact 1 to 1, but my company offers co-invest on the GP side. If you don't have the money, they will let you "buy in" with a company loan at 10% interest. It's really as simple as that. When the deal sells, they take the interest off your distribution.
I'm sure you can get a personal line of credit at certain banks, but I'm not sure what interest rates are being offered these days. I did a personal line of credit over 5 years to pay for my wedding at one point, but that was also back when I could get a 2.25% loan.
Interesting. Thanks for sharing. How is the company loan sized if you don't mind me asking? Surely a more senior person is entitled to a larger loan? Is it just based on income thresholds and basically what you can afford?
For us, you're only allowed to invest up to a certain % based on your position. If someone can invest 1% - their loan can be that entire amount. If they can invest 5%, their loan can be that entire amount.
Ours is 3x leverage at AFR. So if you put in 25k of cash, your total investment is 100k. There are vesting rules on the leverage (I believe it is 3 years of service), but there are exceptions on a case by case basis (vesting rules also terminate if you are let go).
Leverage limit is 5mm, so you can invest up to 1.67mm and be fully 3x levered.
My only caution on taking money from family and friends is that it will look weird for an analyst/associate to be investing really large amounts if you aren't a known trust fund kid. An analyst putting in 25k, like sure. You averaged 115k a year for the last 3 years and saved 25k a year because you lived with roommates and you are diversifying your holdings. Same analyst putting in 2mm, there will be questions.
Thanks for the comment! That is very interesting. 3x leverage seems pretty great if you ask me. And to clear it up, I didn't mean taking in money from family and friends at my current age. I was thinking more like 10 years down the line in my lower 30's. Just was curious if anybody actually does this.
I know one person who borrowed money from his dad so he was essentially 9x levered on his investment, but don't know of anyone specifically that has syndicated out their investment.
I would say if you do it, don't tell anyone. I'm going to guess it would be frowned upon if you have a leverage program because that is really an employee only benefit to create alignment of incentives and not like a money making opportunity.
Also, I have no idea how you would handle the taxes.
My company allows you to invest through an LLC/Trust if you want, but you have to provide organizational documents which would include the ownership splits. I know they are okay with minor children/trusts being part of the ownership, but not sure if you go down the tree to your grandmother, if they would care.
First Republic Bank used to be the leader in the PLOC for this kind of stuff. They had a product that gave you 2 years to draw and then locked your balance at a fixed rate. You can still find these kind of products but the rates are pretty bad now a days.
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