Seems like everything at this point in the cycle feels frothy in terms of value. Institutional LP equity is more sensitive to basis today vs exit value in order to achieve the desired returns for typical value add deals. Bridge lenders in the space (think Mesa West, ACORE, etc) seem to be pricing debt to where they are competitive with bank lenders on certain deals. Guys I know who were super active in the smaller bridge space (i.e. $1-5MM loans, 12-24 maturities, 7-9% rates) are getting squeezed on rates and are down on originations. Co-GP equity funds seem to be sprouting up more recently, although I would wonder how much volume they can really do considering the size of the typical GP equity check, and it seems the benefit would be for a capital restricted sponsor or someone who simply wants to promote off the co-GP for a better net return?
If you had access to discretionary capital, where would you pitch them as the best place to invest, in terms of the capital stack, where there is an opportunity to actually put money out due to a need, and where the risk adjusted returns are defensible?
conduit CMBS/agency CMBS offer the best risk adjusted return, because they just earn fees all day and take no risk
it was pretty common to see 80-100% return on equity in 2017, meaning $1 dollar capital will make you $1 or more profit every year....
Shouldn't the answer be "everywhere and nowhere"? The whole point of returns being "risk adjusted" is that all returns should be equal once adjusted for risk. It's pretty much the definition. How much appetite you have for risk will determine what you make, but if you assume the market is even slightly efficient, then whatever the difference in returns is, is how the market is pricing risk.
Theoretically, yes. However, things tend towards equilibrium rather than simultaneously and immediately shifting to equilibrium - RE just isn't an efficient enough market to do so. While things are shifting, there's some area that's generating better risk-adjusted returns than another. I can't tell you what it is, but being in the bridge space, can confirm what OP has heard about it not being bridge-lending anymore.
That was my point. If a capital provider approached you today with $50-$100MM of funds and said they wanted to invest, where would you pitch them on the right space to play in? Again, if pitching them on 5-6% returns in smaller bridge loans is something that can be justified and also where the ability to actually deploy capital consistently makes sense, that's fine. If doing $1-3MM co-gp equity investments with proven sponsors at net IRRs of 16-20%, does that sound better?
That was my question, where is there a space where there still exists opportunity and where you won't feel like your capital is totally commoditized (maybe no such space exists) and where you can feel enthusiastic about pitching as the right bet at this point in the cycle.
It's so hard to find anywhere where potential returns make sense in RE right now IMO. There's something to be said for being willing to be patient. There's a good reason, "Chill the fuck out and don't do deals unless you see a great opportunity" is a thing you'll find almost every very well known investor say including Lord Buffet and Captain Marks of Oaktree.
Today would you say an acceptable answer is mezzanine debt due to high coupon and ability to convert to equity so flexible structure? I would say floating rate due to the interest rate environment but could be fixed as well.
I have limited knowledge on the debt space so open to any criticism. This would be for a question where would you invest today in the cap stack, why for interview at a large debt fund ($5+ billion AUM).
B-Notes than act as A in repayment priority(5% margin-ish and you can warehouse). Imagine getting senior priortiy(depends) and the coupon is 5% with 50% leverage at 3%, the returns would be 13%). I have to look into warehouse pricing for B notes on larege institutional deals. But something along these lines.
, and Mezz where you can take over when in the money.
Mezz debt or preferred equity on smaller projects ($5-$20M check). Mezz is strong across the spectrum right now, and pref can bridge a capital gap for smaller players and is in a position right now where you can negotiate pretty favorable terms (i.e. 10-13% pref, equity kicker, etc.)
I hate using the term “risk-adjusted” returns because the analysis is often too subjective to even hold water in any discussion. What one investor decides is their discount rate for an investment is really just them eyeballing what the perceived value is and will be different for every investor. It’s like a fake award that investors make up themselves to pat themselves on the back for doing due diligence. Means nothing at the end of the day, just leverage your industry experience and build confidence off that.
Mezz or pref with 15-20% equity cushion
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