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Private Debt

Real estate debt funds help connect borrowers (often developers) with short-term capital for commercial real estate projects like multifamily buildings, shopping centers, construction loans, and many other property types.

The Breakdown

Private debt is everywhere.

Private debt is a financing solution provided by private, institutional or corporate investors to complement or replace a bank loan. The conditions for obtaining a bank loan are very strict, the time required to obtain it can be very long and it is not possible to obtain it in all financial packages. Private debt is therefore emerging as an alternative financing solution that is attracting more and more investors. Their ability to move quickly and their more accessible lending criteria make it likely that real estate debt funds will occupy a critical place in the real estate markets.

"The U.S. bond giant PIMCO ($1.8 trillion in assets) expects the next few years to provide the best opportunities for private credit. As banks become more cautious on lending due to lower liquidity and regulatory scrutiny, this has created a "void in lending markets". As private credit investors, this is the environment we’ve been waiting for," portfolio managers at PIMCO said in a note. The next few years will be great vintages, we believe.
- Reuters, Nov 27th 2023
What is a Real Estate Debt Fund?

A real estate debt fund consists of private equity-backed capital that lends money to prospective real estate buyers or current owners of real estate assets. Investors in these funds receive periodic payments for the interest charged against loaned capital, and security charged against property assets, which takes the form of a mortgage. These funds offer loans collateralized by senior real estate assets to borrowers for a wide range of commercial and business real estate needs.

Most debt funds are focused on a particular loan strategy or investment idea. For example, some funds will focus on offering residential construction loans to multifamily apartment builders, while others might concentrate on financing retail and shopping developments. Other common loan types include industrial, construction, hospitality/hotel, and vacant land.

Which Borrowers Turn to Debt Funds for Capital?

Debt funds can offer commercial real estate borrowers loans and terms that traditional lenders cannot, or will not offer. They work with borrowers who have complex financial situations or do not have access to conventional credit for whatever reason.

Some of the most common loan types include:

-Bridge Loans/Lease-Up Financing
-Construction Loans
-Property Rehab/Redevelopment Loans

What Sets Real Estate Debt Funds Apart

Real estate debt funds first took off in the wake of the 2008 housing crisis. At the time, traditional lenders like banks were suffering from significant liquidity issues, and commercial real estate credit dried up. Post-crisis regulation then created additional restrictions on traditional lenders that limited the types of loans they could originate. Many private lenders, including real estate debt funds, stepped into this gap and began lending to commercial real estate investors and businesses.

Debt funds offer loans in the sweet spot where borrowers need amounts too large for small lenders and not large enough for non-bank institutional lenders, generally less than €100 million.

The Private Debt Opportunity
01.
Shift to private credit

As traditional lenders continue to pull back from commercial markets, private credit has filled the gap, with more companies gravitating to private credit.
02.
Deal flow in private credit

The overall demand for private credit from high-quality borrowers and the volume of dry powder should provide strong deal flow and allow managers to be highly selective.
03.
Illiquidity premium

For investors, private senior and unitranche loans typically deliver an illiquidity premium and the difference can be significantly wider for opportunistic, distressed and subordinated debt.
  • Private debt has moved from a novel idea to the mainstream
  • More than a trillion dollars in outstanding private debt
  • It offers strategies and access points for investors of all types
  • Public debt market issuances are only accessible to large companies
  • Private credit is very flexible and can fit most needs
  • European companies to increasingly rely on non-bank lenders
Important information
Openstone is a brand of Innovative Finance SAS, a French corporation registered under no 901549766. Innovative Finance is a registered Financial Investment Advisor (CIF) listed with the Organization for the Single Register of Intermediaries in Insurance, Banking and Finance (ORIAS) under number 23002459. You can check this registration on the ORIAS website, https://orias.fr. Innovative Finance is a member of the National Chamber of Wealth Management Advice (CNCGP), an association approved by the Financial Markets Authority (AMF) whose mail address is: 17, Place de la Bourse 75082 Paris cedex 02 and internet address : www.amf-france.org

Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.


Alternative investments in private placements are highly illiquid, speculative, and involve a high degree of risk. Past performance is not indicative of future results. Investors may not get back their money originally invested and those who cannot afford to lose their entire investment should not invest. Prior to investing, carefully consider the respective fund documentation for details about potential risks, charges, and expenses. The value of an investment may go down as well as up. An investment in a private equity ("PE") fund or investment vehicle is not the same as a deposit with a banking institution. Investors receive illiquid and/or restricted membership interests that may be subject to holding period requirements and/or liquidity concerns. Investors who cannot hold an investment for the long term (at least 10 years) should not invest. In the most sensible investment strategy for PE investing, PE should only be part of your overall investment portfolio.