How Do Real Estate Credit Funds Drive Value-Add Returns?
Pretty simple question. I'm just curious how closed-ended private funds that invest into Real Estate credit hit value-add level returns? Just curious because the highest rate I've ever seen a Mezz/Pref Equity investment command is 13.5%. Doesn't seem these credit investments would really make for good appreciation opportunities. Is there leverage added to juice returns? Is the focus moreso on buying existing distressed notes for a discount and working the out? Are the hurdles on the waterfall merely set at lower rates of return to begin with to compensate for the relatively more secure investments?
Yup they lever up via repo lines and make a spread on their LOCs cost of capital vs the yield on their credit products.
Thanks for the response! Can you help me on this Repo business? Is my understanding here correct?
-Credit Fund Makes Loan. -Credit Fund Sells Loan to Prime Broker/Bank and agrees to buy it back at a slightly higher price in the future. -In the meantime the credit fund is still entitled to the interest payments received from the loan. -The credit fund is also free to invest the cash that they receive from the loan's sale into other assets. -At the end of a 3 months or so the credit fund will either extend the Repo agreement, use existing cash or sell other assets to purchase back the loan they initially sold.
My real confusion with the Repo market is that it's such a short term financing arrangement. Would this imply that mREITs and Debt Funds are constantly trading debt the way a bond fund manager would?
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