Real Estate Debt Funds

Does anyone have experience with real estate debt funds? This could include working at, worked at, worked with, or having friends or coworkers who have worked at one. Examples would be Blackstone RE Debt Strategies, Fortress, Colony, Apollo, Oaktree, Starwood, Harrison Street, Torchlight, Rialto, NXT, Mesa West etc. This could also include non-bank real estate debt providers such as Capmark, Cornerstone, Invesco's structured finance arm.

I'm interested in hearing about overall experience, exit opps, lending parameters, compensation, work/life balance, and the interview process.

I think this space will undergo a significant amount of growth over the next few years, as banks will be forced to pull back with the implementation of Basel 3 and Dodd Frank, and there is a $1TN of CMBS debt that was originated during the boom years coming due between now and 2017. "A snake swallowing an elephant" as this Bloomberg described few weeks ago:

http://www.bloomberg.com/news/2014-02-06/hedge-fun...

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Comments (68)

Feb 20, 2014

No experience working with them although i'm curious as well. These firms really appeal to me, underwriting transactions that balance sheet banks pass up on. P.S. You Bloomberg article dosn't seem to work.

Feb 20, 2014

Try this link:

http://mobile.bloomberg.com/news/2014-02-06/hedge-...

Or googling "bloomberg $1 trillion property bill"

Feb 26, 2014

also curious.

Feb 27, 2014

Those are all smart guys. Fairly niche space but you can make a ton of money. Interesting to read that LibreMax is doing hotels, btw.

Mar 6, 2014

bump. C-III too! any other info on these debt funds?

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Mar 7, 2014

Also very curious.

Mar 8, 2014

These types of funds make sense for the investors. Lend for 12% interest and buy credit default swaps OTC, even for huge premiums, and walk away with 7-9% net returns with very low risk.

Can't see anything structurally wrong with this in the economy. :)

Mar 8, 2014

To the OP's question, yes, I have some limited experience working with them (my organization and their organization). The research analyst's of the organization I worked with averaged about $133,000 per year of all-in comp in NYC. Pretty good work-life balance since they don't serve any clients (the way an investment bank does when it's rushing to win a deal). Full of Ivy Leaguers. Sophisticated as hell--my guess is that a research analyst's interview would include questions on law, foreign policy/geopolitics, economics, finance, real estate, hedging, the Federal Reserve, etc. Since debt, high yield debt, and distressed debt can be highly event driven I would guess that the best analysts and PMs are the jack of all trades + the master of some.

Mar 10, 2014

Anyone have any books/blogs on the topic they would recommend?

Oct 9, 2014

Does anyone have any idea of the possibility of going from private equity real estate (3 yrs exp) to a HF focusing on real estate?

Are such lateral moves common/possible?

My pitch would be that I can both model the deals and understand the underlying real estate (my current job involves market research, property tours, etc.).

Does anyone have resources (ideally a guide or Excel template) on modelling distressed/high yield debt that they could share with me? I've only modeled equity investments to date.

Thanks!

Oct 9, 2014
RE Monkey:

Does anyone have any idea of the possibility of going from private equity real estate (3 yrs exp) to a HF focusing on real estate?

Are such lateral moves common/possible?

Definitely possible. I do not know anyone that has done it personally, but I do know a guy that did REIB at Lazard and then transitioned to a HF focusing in direct investments (Farallon).

Oct 9, 2014

Thanks. Any insight/advice into how to get HF jobs like that?

I'm from a non-target, but got my current gig from my MSF school.

Oct 9, 2014

It sounds like you mean a HF that covers real estate (REITs)? I ask because there are HF that have direct RE investments (e.g., Farallon)

The answer to both questions is yes, but if you do the former I'd start studying for the CFA

Oct 9, 2014

I'm referring more to private real estate, not REITs.

I just checked the Farallon website and their RE strategy is more or less what I'm talking about:

"This strategy pursues investments in fee simple real estate, leaseholds, mortgages, or other real estate-related assets, especially in cases where redevelopment, leasing, and addition of management expertise can add value. Farallon invests across a broad range of real estate assets and at various points in the capital structure of a real estate transaction. Investments typically involve the purchase of assets that we believe are undervalued or inefficiently managed or financed, in particular assets that are valued at a significant discount to replacement cost or can be developed to higher and better uses. Farallon often partners with experienced local developers who are involved in day-to-day management and oversight of specific real estate projects."

Oct 9, 2014

Not telling you anything you don't already know, but networking. To be completely honest, it's will be challenging coming from a non-target, but for sure possible.

Check out the backgrounds on the real estate investment professionals at Farallon - > wide spectrum of backgrounds including development, REIB, REPE, debt funds. Some come from non targets, so clearly it is possible.

http://www.faralloncapital.com/our-team/investment...

Jan 26, 2017

BUMP!!! Any more comments on these debt funds?

Dec 14, 2015

Currently working for a (<$5B) MM RE bridge debt fund. If you are still interested, I can answer some of your questions. 80% LTV, non-recourse, etc...

Mar 11, 2016

does your fund finance healthcare properties?

Dec 14, 2015

No. Not really our area of expertise.

Feb 17, 2019

Hi CRE-Finance,
I wish I saw your post earlier.
Do you have more updated data points for 2018/2019?
I also work for a real estate debt fund that invests in CRE bridge loans and CMBS B-pieces. Would very much like to know the compensation structure, base and bonus, would be.
And more specifically, I'm no the capital markets side, doing fund level cash flow modeling (fund returns, stress test, scenario analysis).
Many Thanks,

Feb 20, 2019

Gordon,

Can you shed some light on B piece investing and why firms take the coupon risk? Personally, do see this to be a good investment? Which companies typically invest in this piece?

Dec 14, 2015

@Gordon_C feel free to DM me with your questions.

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Dec 16, 2015

@CRE-Finance, what percentage of your job is originating vs. underwriting new deals? Similar question, but phrased differently, what is your day to day like? Where in the debt stack does your firm invest? Where do you source new deals from? Thank you.

Dec 14, 2015

I split my time between asset mgmt and deal sizing. Focus is on 1st mortgages but will occasionally do preferred equity with strong sponsors. We find our deals through brokers and repeat clients.

Mar 25, 2017

I know I'm late but Check out Contrarian out of Greenwich

Dec 14, 2015

Som1 - Use your network and try to set up informational interviews. Coming from CMBS you have the technical skill set they are looking for, so it shouldn't be too difficult.

Mar 25, 2017

bump

Mar 25, 2017

Not impossible, but definitely an uphill battle.

Mar 25, 2017

Not that hard if the major debt fund is actually involved in investing in debt across the entire capital stack and you are involved in it. Particularly if you are doing sub-debt with participation or the like. But if you are doing that, it begs the question, why you would want to leave given where equity returns are in CRE right now relative to flexible debt capital?

    • 2
Feb 20, 2014

If it's a Debt Fund at a PE shop, I can't imagine it's that difficult to lateral over to the direct RE investments side of the PE shop, right? For instance Starwood debt to Starwood equity, Blackstone debt strategies to Blackstone equity, Oaktree debt to oaktree equity, etc.

Mar 25, 2017

Bumping this old thread because it's the exact question on my mind and I don't want to start a redundant thread. Why would the move be difficult, given that it's just different parts of the capital stack? Is there really that high of a risk of being pigeonholed/labeled as a debt guy?

Mar 25, 2017

Although I have never made the move (doing mainly debt right now), I don't think the move would be that difficult. I often see people from valuation or appraisal groups able to land an analyst gig at reputable shops so I don't think someone doing debt would be at that much of a disadvantage.

I believe labeling does go on, but I imagine that happens 7-10 years into one's career when relationships are taken into account and people are expected to hit the ground running...

Mar 25, 2017

Here are my .02...

I would value a guy coming from the debt side more than a lateral transfer from the equity side. This is assuming you're a solid real estate investor to begin with. Also assuming analyst/associate level and you are working for a top tier debt fund not a placement shop.

Mar 25, 2017

@investREanalyst I appreciate the feedback. I can understand how someone might get labeled as they spend more and more time working and building relationships as a debt guy. @capratecompression are you saying you would rather have a debt guy on your team as opposed to just another equity guy? I imagine a well-rounded candidate or team would have experience on both ends, which is what I imagine you're describing.

Mar 25, 2017

First I'll say this is just opinion, if I was running the interviews...I would rather have a sound investor who worked at a top debt fund as opposed to a guy coming from an equity shop. The debt world is flooded with so much non-investment strategy complexity that I'd rather have someone with sound CRE investment insight who is well trained on the debt side (i'm not talking balance sheet lending). Equity strategy focus comes from up above anyhow, you will learn how to think. I think an analyst/associate as described above would add more value to my team.

Also depends on the type of shop, size of shop, team, etc.

Mar 25, 2017

OP curious to hear your insights/perspectives regarding a debt fund. Do you enjoy your work? What is pushing you to transition from debt to equity?

Mar 25, 2017

Could anyone comment on possible exit opps/B-School's opinion on positions in debt funds..?

Mar 25, 2017

Interested, as well. Just to add some obvious names to the list: Sankaty, Sankaty Middle Market, Crescent Capital Group, Newstone Capital Partners, Northwestern Mutual Capital, Prudential Capital.

Mar 25, 2017
Mar 25, 2017

I would recommend taking a look at https://www.privatedebtinvestor.com/. They have a list of the biggest funds raised over the past few years,as well as the amounts raised. I would probably add Ares,3i, Partners Group, Highbridge, ICG as some of the more important ones. also, in case you missed it: https://www.preqin.com/docs/reports/Preqin-Special....

    • 2
Mar 25, 2017

Most of the debt funds I come across just do property level deals. Usually transitional, a little hairier and higher leverage than a typical bank deal. The borrower pays for it in spread. What you're describing sounds very cool though. I cannot imagine there are many firms that do that outside of the large PE firms (Blackstone, etc.)....Using finance logic I would guess you would categorize/rank the loans in some way (bond rating for example) and then solve for the risk adjusted YTM to get your pricing on each loan and sum.

Mar 25, 2017

thank you for your input!

Observe. Learn. Share.

Mar 25, 2017

I think the concept here is good but there's way too much that could go wrong at the property level. I couldn't imagine not modeling out an entire fund that we're looking to acquire and not digging through all those properties - even though that would be hell. In theory solving for your risk adjusted YTM to get your price would be great but I think in real estate it's just unpractical. Too much can go wrong in the properties. Too many outlying factors. Thoughts?

Dec 14, 2015

From my experience in CRE lending, almost everything structure-wise is deal specific - trying to mitigate specific risks and ensure sponsor alignment.

As far as valuing loan portfolios, they generally start at book value and then are adjusted up or down based on loan performance, LTV, and spread...

How did the interview go? Did you learn anything else about the company?

Mar 25, 2017

Hi, thank you for the comment and sorry for the late reply - WSO wasn't notifying me of new comments which is weird.

Yes the portfolio acquisition was basically what you have just described, I asked them about it during the interview and it wasn't as "magic" as I thought it was.

The interview went OK. I did not get the job because there is a better candidate for it. The HR then put me in the upcoming superday with their AM team in the RE fund.

Observe. Learn. Share.

Mar 25, 2017

im sorry but can you explain to me how to value a portfolio of loans?

Mar 11, 2019

Hi CRE-finance, are you able to share what are some of the underwriting criteria that you will look out for when evaluating a real estate project debt fund?

Dec 14, 2015

bump

Best Response
Mar 25, 2017

Most debt funds will focus on higher yielding debt be it mezz, transitional loans, or b pieces at an asset or portfolio level. Post GECRE sale a big void has existed for REPE financing for large scale portfolios and REIT LBOs, as GE was largely the counter party on large sponsor level financing that didn't check the conservative life co / bank debt boxes.

    • 2
Mar 25, 2017

can anyone shed light on how internship experience (as the OP alluded to) at a REPE debt fund would play into career development in the RE investment space? Is this viewed as a viable way to learn how assets are financed and really understand the capital stack?

Mar 25, 2017

If you work at a debt fund that does institutional size deals your exit ops are unlimited like Eastdil good if not better.

Mar 25, 2017

How deep are their fingers inside the debt?

Mar 25, 2017

Pretty deep, man. Pretty deep. Like, second knuckle at least.

Mar 25, 2017

ooh...thats nice

I'm making it up as I go along.

Mar 25, 2017

No. Chinese wall separating the units. It is to their benefit to properly manage the conflict of interests.

Oct 13, 2018

Can anyone provide some insight on the compensation that can be expected at real estate debt funds at both the Analyst and Associate levels? I realize comp can vary between a MM fund vs a MF but any insight would be appreciated.

Oct 13, 2018

Bump

Feb 20, 2019

Where do all these firms get the capital to lend all of this money? From investors and banks? Any specific term for the credit facilities they receive from banks?

What happens if you loan money from a bank at 5%, lend out at 10% but your borrower defaulted and now you can't pay back your loan to the bank? How does the bank get its money back?

Also, would it be possible to start your own firm lending out money? Do you need a lot of connections?

There are so many debt firms now I'm wondering what everyone's competitive advantages are?