CRE Thought Leadership

Commercial real estate (“CRE”) private credit has a place in every portfolio, especially in the current economic environment, which is marked by peak prices, volatility, and slowing growth.  This asset class has gone from being virtually untracked 20 years ago to $60B in dry powder (raised but uninvested capital) in recent months.

Regulations on banks after the last financial crisis combined with new laws benefiting smaller investors have allowed this space to thrive in the last five years. Investors have discovered its appeal and we think it’s here to stay.  Before we dive into what investors are finding so compelling, let’s define what “CRE private credit” is.

CRE private credit is an asset class that consists of loans backed by commercial real estate properties. The properties act as the loans’ collateral such that, in the event a loan does not perform, the lender can take ownership of the property. This structure can increase security for a lender and reduce the risk of loss on an investment.

Real estate crowdfunding has been quietly evolving on the sidelines during the latest commercial real estate bull market.  Critics dismissed this new form of capital raising as just another fad or buzzword du jour.  However, crowdfunding platform founders claim that it is destined to overtake traditional capitalization methods in the not too distant future.  Regardless, the major objections to crowdfunding are dissipating rapidly as advancements in supporting technology trends (to be discussed in a subsequent post) allow for greater investment transparency and growing user-adoption.  As this industry matures, real estate investors and sponsors will be able to connect more efficiently, creating greater competition for capital and deals.  This increased efficiency and competition will result in a broader demand for quality deals and cheap equity.  However, before market participants may hope to reap these benefits, they should first be aware of the basics of crowdfunding.

Over the course of a series of posts, I intend to cover some of the key differentiators of crowdfunding platforms that affect investors and sponsors.  These consist of two major areas: differentiation of platforms and differentiation of offerings.  While both platforms and offerings have significant effects on both investors and sponsors, investors should be more concerned with understanding the platform, and sponsors with understanding the offering.

The Rise of a New Asset Class

Since the Great Financial Crisis, the low yield environment, as well as certain regulatory changes, have given rise to a previously lesser-known alternative asset class known as “private credit”.  Private credit funds target ownership in debt and debt-like instruments across various segments (corporate, consumer, real estate, litigation, life settlements, royalties, etc.) with the goal of generating high yields, mostly in the form of ordinary income, for their investors. 

Catching the Service Provider World Off Guard

As this asset class rose to popularity rather quickly, it seems to have caught the outside service provider world largely unprepared, having a lack of experience on how to manage, account, and administer this new asset class.  As a result, most service providers advising private credit managers defaulted to their knowledge of private equity fund formation and administration, resulting in many of these funds being structured like traditional private equity funds.