For years, commercial real estate has been a popular investment among members of Tiger 21, a network of ultra-high-net-worth investors based primarily in the United States. Many people have made their fortunes in this field, and even those who haven't have been able to take advantage of low interest rates to finance buildings they sell and use leverage to increase investment returns.
However, starting in 2022, rising interest rates, increasing reluctance from lenders, and falling real estate prices are all putting pressure on profits. As a result, many wealthy people are switching to lending cash to people who invest, rather than investing in the buildings themselves.
“Currently, borrowing from banks is not 'free' and it is not easy. [to secure]Real estate doesn’t have the luster it used to,” explains Rob Fleischman, technology entrepreneur, investor, and chairman of Tiger 21’s Boston Group. “Returns are compressed and risks are higher. However, in this interest rate environment, it is better to be a lender to real estate parties, and you can obtain real estate as collateral.”
Mr. Fleischman and his associates are part of a growing group of wealthy individuals who lend to a variety of private companies, either directly or through specialized funds. For U.S. family offices that invest the assets of one or more extremely wealthy individuals or families, the average allocation to private credit will increase from 8% of total assets in 2018 to 11% in 2023, according to data provider Preqin. %. In European family offices, that proportion increased from 9% to 13%.
A big part of the appeal is that higher returns can now be earned from activities that were once hampered by persistently low interest rates.
“This is the first time in 10 years that we have been able to earn 10 percent to 12 percent annually on senior secured first lien credit.” [to] It's a great, profitable company,” said Nancy Curtin, chief investment officer at Alti Tiedemann Global. This type of loan is considered the least risky, as it must be repaid before other debts. Mr. Tiedemann's high-net-worth clients, primarily based in the United States or Europe, have investable assets of between $25 million and $1 billion, representing a total of $49 billion.
But another important change has been improved liquidity, thanks to a number of new open-end funds launched in recent years by major alternative investment managers such as Blackstone, Ares Management, and Apollo Global Management. Thing. These offer investors an alternative to the traditionally dominant closed-end funds that lock up investors' money for years.
Thibault Sandret, head of private debt research at bfinance, a UK-based consultancy that advises family offices and financial institutions on investments, estimates that more than 40 open-end funds have been launched in the past three years. ing. “And that number continues to grow every month,” he added.
Daniel O'Donnell, global head of alternative investments at Citi Global Wealth in Boston, emphasizes the benefits. “A typical closed-end direct loan fund has a term of six to 10 years,” he says. “The funds we are currently focusing on are: [for investors] There is quarterly liquidity. ”
Large fund managers typically offer both closed-end and open-end funds, with the former offering higher returns in exchange for longer lock-up periods.
But for experienced investors, including many members of Tiger 21, directly negotiated direct financing agreements with companies can yield even higher returns.
“For entry-level investors, open-end or semi-liquid funds are a way to get a foot in the door,” said Chee Jieun, head of private markets and alternatives at Bank of Singapore, a private bank owned by OCBC. Wen suggests. “Direct private credit transactions represent an attractive opportunity for sophisticated investors seeking more direct involvement and control over their investments.”
However, investors entering this sector must balance the risks with these benefits. The quarterly liquidity provided by open-end funds is inconsistent with multi-year loan terms, so there is a risk that the fund will halt withdrawals if too many investors seek redemptions at once.
“The market is still young and untested,” Sandrett points out.
Sky Kwar, director of investment advisory at Singapore-based Raffles Family Office, also cautioned that the level of risk may not be clear. “Private credit typically involves lending to unrated or unlisted companies, so it is less transparent,” he says. Still, Raffles Family Office has increased its allocation to this area in recent years.
Leverage, or funds borrowing more money to make loans, also increases risk. A 2023 survey of 58 of the largest private credit funds by Cliffwater, a US alternative investment advisor and fund manager, found that the average leverage level was 112%. “This can amplify volatility and lead to increased losses, especially in a volatile interest rate environment,” Kwar says.
And there are also fund manager fees to consider. These can be relatively expensive, representing an average of 3.94 percent of total assets, according to Cliffwater research. This is one of the reasons why Tiger 21 investors prefer direct investing, he believes, because they believe they can find the best financing opportunities themselves.
