What makes lending so lucrative?

Recently, the firm and market I'm in has been blowing up on the Debt side and our Debt team is hiring many people at the Analyst and Associate level. At the same time, many people were poached to other local firms at nice salary bumps.

My question is, what's so lucrative on the Debt side that is causing this? I know interest rates are hiking and that the mortgage market is overall larger than the Equities side of things, but isn't your upside on Debt inherently capped by the terms of the deal (for Senior Debt at least, not sure about Mezzanine structures since we don's usually do that). Where as in Equity or Direct Investments your upside can be much higher depending on the structure?

Region

WSO Elite Modeling Package

  • 6 courses to mastery: Excel, Financial Statement, LBO, M&A, Valuation and DCF
  • Elite instructors from top BB investment banks and private equity megafunds
  • Includes Company DB + Video Library Access (1 year)

Comments (5)

Most Helpful
May 12, 2022 - 8:15pm
mrcheese321, what's your opinion? Comment below:

On the surface, your return is capped, but with leverage/structural engineering, that isn't the case. Also, sometimes what is a good debt deal isn't a good equity deal. Being lower in the stack with subordinated risk can be very helpful.Leverage example100 mm loan at L+600100bp origination fee100bp exit fee2 year termFully funded at closeYou take leverage from a LOL or a line at L+350, 66.67% advanceSo in equity, a fund has 33.33mm outstandingFor that 33mm, they are earning L+600 plus (250bps x2) plus the fees (100bps per year) = L+1200.

Add in a future funding component or an early repay and you can easily be making 15% plus.

My debt fund is returning a net 13% IRR right now at a very protected subordination level (average 60% LTV). Easy to pay people if you are 2/20.

  • Associate 3 in RE - Comm
May 12, 2022 - 10:50pm

There is a reason why top originators can make more than half a million and main thing to note is that in terms of $/hr, it's astronomical as top originators typically have a support system with screeners who do a lot of the back end work scrubbing the numbers. For reference and a data point, we do not close portfolios for Blackstone but still expect our originators bare minimum to be $100MM in new business and $2.5MM in revenue (fees). The top producers will absolutely smoke that and be at $500MM+ in new business and $10MM+ in revenue. At my place, there is a base and once you cross a certain threshold in fees (for some the threshold is 2x the base) you earn a % of the fees (the % varies based on the tier- it can be 20% for $1-100K over the threshold but 50% for $300K-750K over the threshold). Note lenders dont just make money on pricing, their returns are also driven by loan fees, exit fees, extension fees, etc. Just imagine loan fees is a point, exit is a point, each extension option is 20 or 25 bps, it all adds up. And lastly, once you you get to a certain point, you become more of an account manager due to mostly doing repeat business. If you have a strong relationship with groups like Bridge, Investcorp, Starlight, etc, they will just show you every deal, you dont even have to call them, if they like you and if you have proven yourself, they will also give you the last look and tell you where you need to be to win the deal. It's just layups at that point and easy money due to the steady deal flow but of course to get to that point is easier said than done. 

  • Investment Analyst in RE - Comm
May 13, 2022 - 12:11am

Cumque deleniti tenetur ut eum animi maxime consequatur sit. Eveniet aut sunt ab. Autem neque veritatis perferendis accusamus. Libero eligendi est porro similique. Incidunt quo aut blanditiis illo.

Amet nihil nisi et rerum tempora commodi. Ea repudiandae sed ipsa molestiae voluptas. Quo eum aperiam saepe excepturi fugit quia veritatis.

Start Discussion

Career Advancement Opportunities

June 2022 Investment Banking

  • Jefferies & Company (▲03) 99.6%
  • Lincoln International (= =) 99.2%
  • RBC Capital Markets (▲07) 98.8%
  • Bank of America Merrill Lynch (▲01) 98.4%
  • Houlihan Lokey (▲06) 98.0%

Overall Employee Satisfaction

June 2022 Investment Banking

  • Lincoln International (▲06) 99.6%
  • Jefferies & Company (▲11) 99.2%
  • Greenhill (▲07) 98.8%
  • Rothschild (▲01) 98.4%
  • Evercore (▽01) 98.0%

Professional Growth Opportunities

June 2022 Investment Banking

  • Jefferies & Company (▲04) 99.6%
  • Lincoln International (▲04) 99.2%
  • RBC Capital Markets (▲09) 98.8%
  • Houlihan Lokey (▲07) 98.4%
  • Bank of America Merrill Lynch (▲04) 98.0%

Total Avg Compensation

June 2022 Investment Banking

  • Director/MD (9) $661
  • Vice President (37) $394
  • Associates (190) $246
  • 2nd Year Analyst (117) $162
  • 3rd+ Year Analyst (17) $156
  • 1st Year Analyst (369) $150
  • Intern/Summer Associate (78) $147
  • Intern/Summer Analyst (292) $92