Altigo Beyond Real Estate - Private Credit
When discussing real estate, most people first think of equity real estate transactions in single family, multi-family or public REITs. However, a significant part of this transaction actually involves credit, either a bank or a non-bank lender. In a webinar called "Beyond Real Estate" by Altigo, they invited Chris Carsley, our Chief Investment Officer, to join a panel discussion about alternatives to equity in real estate.
Video Highlights:
Alts Market Update
Real Estate Market Update
Kirkland Income Fund as an example of Private Credit Investment
“Private credit is rapidly expanding. Given the current time and macro environment, it might be wise to aim for a higher position in the capital stack. This could lead to more consistent returns.
Perhaps, it’s better to take on slightly less risk and aim for a slightly higher yield that’s more reliable.”
“The U.S. Real Estate Equity Index has fallen behind U.S. equity by nearly 25 basis points. Several factors contribute to the real estate’s challenges. The pandemic has displaced workers and the population, causing people to stay home more. Interest rates have risen in the last year. Geopolitical risks, such as the situation in Ukraine and trade with China, also play a part.”
Watch the excerpt on Private Credit below.
Transcript
Richard Hillson: So, Alternatives is a pretty broad, catch all terminology, which I think actually does us a disservice sometimes, because so many different types of assets fit within that one umbrella classification, which I think causes a lot of confusion in the space. Um, Matt, do you want to, do you want to talk us through here?
Mat Dellorso: Yeah, so, you know, at Altigo we work with a variety of different alternative fund types and alternative fund managers. Uh, we currently work with over 155 fund managers and they have had more than 850 funds on our platform. that come in these kind of four or five major food groups. Um, we're starting and focusing today on, on private credit.
Uh, but obviously one of the most commonly used and, and known about Alternative Investment categories is real assets. You know, Richard mentioned real estate and oil and gas and energy. Uh, renewables. Also infrastructure. We would put in the real assets category. Each one of these categories is very broad, very diverse.
There's many diff many different types of funds, many different segments of asset classes inside of each of these categories. But broadly today, we're gonna cover private credit, which includes corporate credit and real estate credit. Those are loans made by non-bank institutions or groups, um, into, uh, asset backed, um, loan obligations of, uh, the, um, underlying group or tenant.
And so, in addition to private credit, uh, on Altigo, there's many funds that are in private equity and venture capital. There's many different strategies, uh, there. Chris mentioned he sounded like he worked for an early stage, uh, venture capital group that probably did seed, series A, series B financing.
Private equity might include leveraged buyouts or growth equity, um, or even secondaries. And so there's more to explore in private equity and venture capital. And we'll be doing that in part two of this webinar series. And then also there's hedge funds. Hedge funds come in many different varieties as well.
Chris mentioned, uh, arbitrage strategies. There's also long short, uh, data driven or event driven strategies. Hedge funds have been around since the 1950s and are part of, uh, the stable of alternative investments that many advisors put in their product menu to help diversify client portfolios and maybe more recently or more esoteric, there's other strategies, uh, certainly digital assets, not in real assets, digital assets, such as crypto would go in the other category, potentially art and collectibles and even things like litigation finance or settlements.
Um, or other types of pooled like insurance portfolios, uh, could be in the other category. So in Altigo, we see many of these different types of Alternative Investment funds and fund managers. Uh, they're all very broad and big and diverse and, uh, each deserve its own merit and deep dive session. Today, we're going to be touching on private credit, but first bridging into private credit through talking about real estate.
So, Richard, on the next slide, uh, we on Altigo have seen advisors, um, mostly allocate and have a very good comfort with real assets. With real estate, energy, they're also doing private equity and private credit. Uh, they're wanting to learn more about private equity and private credit and hedge funds and other types of alternative investments and that's the reason why we're doing this webinar series.
So this slide just shows, uh, in the industry, a group polled a hundred different financial advisors and asked them their current comfort and, um, usage of Alternative Investments. Alternative Investments have been growing over the past decade in terms of diversifying a 60 40 portfolio to increase yield to, uh, better diversify and be uncorrelated.
And most advisors, uh, in this poll of 100 or so advisors, uh, had comfort with real estate, knew about private equity, knew about private credit, and were doing, uh, a majority of their Alternative Business across those three strategies. With perhaps, um, the opportunity for more knowledge or education or sharing in structured notes, venture capital, digital assets.
Uh, but today we wanted to start with real estate, uh, and specifically with Chris's group about private credit and real estate. Um, and then get into private credit, uh, more specifically with, uh, CLOs and Joey and Eagle Point.
Richard Hillson: And Matt, that this. When I first saw this, this kind of surprised me as I thought the, the, this would be overwhelming and, and we don't know the sophistication of these advisors or how long they've been doing alts, but to see private credit up there as, you know, a very close second was really surprising to me because I think two years ago at the conferences, the diligence conferences that we go to all the time, you wouldn't have seen too many private credit firms presenting.
It was predominantly multifamily Real Estate, Opportunity Zones DST, and I've read a few things recently about, um, and I think it was a Blackstone presentation and, um, iCapital as well, recently where they've said that private credit is the fastest growing area of the market. Overwhelmingly so. For me, that's really reassuring that advisors are not just sticking in their comfort zone with just real estate, but looking further afield.
But it kind of surprised me a little bit. So, I mean, did you feel the same when you saw this in terms of, whoa, where did, where did private credit come from?
Mat Dellorso: For sure. Yeah, private credit is fast growing. Obviously, we're going to talk a little bit today about some of the headwinds in real estate, and it just makes sense as a, time and in the macro environment to maybe take a more senior position in the capital stack and look for more consistent returns.
Maybe you take a little bit less risk and go for a little bit of higher yield that's more consistent. Um, but yes, absolutely. We've seen private credit strategies and the desire to access private credit, uh, grow on the Altigo platform. And, but yes, real estate has still been the starting point the more, the most dominant, um, alternative asset class on Altigo as you know, most advisors and most sophisticated investors are homeowners You know, it is an asset class that people can touch and feel and generally pretty well understand But clearly there is a shift of wanting to learn more and access more private credit and private equity and that's the reason we're here
Richard Hillson: Okay. So, um, let's talk about this for, um, for a moment is Real estate has typically been the, the starting point here for, for a number of reasons can provide growth in the portfolio can be income. It can be a hybrid diversified in terms of is not strictly correlated to everything's correlated one way or the other, but it's certainly not a strong correlation with the equity market.
So a diversification tool and a hedge against inflation. Um, I think that one of the reasons real estate is the go to is, and this would literally be an advisor who's been a 60 40, when I say 60 40, 60 percent stocks, 40 percent bonds, the traditional portfolio with no alternatives in it, an advisor who's been a staunch 60 40 guy for a long time who says, all right, I need to not just be, um, cyclical and not diversified in enough ways. So let's start looking at alternatives. Real estate is the easiest way for them to take that first step. And for their clients as well, because let's not forget, no matter how comfortable an advisor is with some of the more exotic alts, you have to get your clients on board who might not understand it or have even worse misconceptions.
Oh, I did some crypto and it was terrible. I'm never doing alts again. Does that mean you once picked a bad stock, you're never picking a stock again? It doesn't make sense, but they're the conversations that people are really having to have. So real estate always made sense as the first step into this.
And so REITs have always been publicly traded REITs have been the easiest way to get a piece of a larger portfolio, um, private funds or direct assets. And I think one of the reasons investors and advisors can get there quickly is a lot of affluent clients have direct investments in second homes and investment properties, etc.
So real estate has always been a great starting point, but we're going to talk a bit about some of the concerns that people are having about real estate based on the different types of real estate investments here and the asset types. Matt, anything you want to add to the kind of the real estate intro here?
Mat Dellorso: No, I think that's great, Richard. You know, we're trying to move beyond real estate. So I think that's, um, a good just general overview there of real estate. I want to share, um, as we at Altigo track, uh, funds and flows of capital raising and, and, uh, investor, you know, commitments into funds. And so I wanted to share just some of the largest real estate fund managers, as you can see the list here, we at Altigo work with some of these groups, many of these firms are household names, Richard, you've mentioned Blackstone, there's Brookfield, Oak Tree on the list here, Carlisle, Goldman Sachs, Prudential, and even foreign investment firms like China Merchants has come into the Alternative Investment real estate fund management space over the past decade or so.
You can do the counts here. It's more than 400 billion has been raised by these firms to invest in U. S. based real estate, and it's been more than 100 different funds by these really top of the bell curve, large institutional fund managers. Now, it's a very broad and diverse asset class real estate fund management.
There are many, many emerging smaller, more boutique, many different strategies inside of real estate investing and fund management, uh, that aren't accounted here, but these are some of the common household names that some of you may have on your product menu or allocate clients to. We wanted to, uh, also highlight and, and, um, you know, display some other emerging managers here like Chris's Firm and Kirkland, who are also doing stuff in real estate that is interesting and could be a diversification option for you and your clients.
And one of the reasons why we think it's an interesting time to go beyond real estate is because over the last 12 months, real estate has obviously faced several headwinds. Uh, this is a graph here, um, of Morningstar data tracking U. S. public equities and U. S. real estate indexes. Where the U. S. Real Estate Index, Equity Index has lagged behind US equity by almost a spread of 25 basis points. And there's many reasons probably why real estate is facing headwinds, obviously starting with dislocation of workers and the population from the pandemic, staying more at home, from raising interest rates over the last 12 months, from geopolitical risk of Ukraine and other China trade happening.
But obviously, um, cap rates are compressing, it is getting tougher to refinance, um, and there is just a, uh, tougher environment for real estate capital raisers to come out with funds and allocate to real estate when risk free treasuries and bonds are at decade highs. Um, so we're seeing, uh, real estate face headwinds and maybe now is the time for advisors to explore other things, you know, in their alternative investment portfolio and in their alternative investment stable that are not just real estate, multifamily or REITs, uh, but maybe a little bit different, differentiated, maybe a different position in the capital stack, uh, like real estate, private credit.
Richard Hillson: Okay, so, um, I think this came out when we were discussing this this week and I quite liked the analogy there, but if we are thinking about a Venn diagram of real estate and private credit is. Ah, what actually kind of overlaps there between the two and bridges the gap and, um, Chris and I started speaking, I think, the end of last year and it was interesting for me because I was regularly getting the question from advisors.
I don't want to go too far from real estate. I'm still like, I don't want to get too adventurous. I'm pretty conservative here, but is there a way to do something else in real estate that maybe has less correlation or that has a different return profile in this marketplace other than the traditional straight up equity in real estate?
So what about, as well as looking at different categories, whether it's self-storage or whether it's in digital infrastructure within real estate, what about looking at a different type of profile? So debt within real estate. Um, so this was very timely as far as, um, the conversations here. So, uh, Chris, uh, as the guy who sits in between these two and bridges both of these asset classes here, uh, perhaps you can talk a little about your thoughts and, uh, and what, what you guys are doing.
Chris Carsley: Yeah, certainly. Um, I mean, one of the things to start off it, you had mentioned earlier, you know, and many of the people on this call are financial advisors managing other people's money. And, you know, let's just say. Use the uh, standbys. Okay, most people were in that 60 40 and you really saw the adoption quite quickly into equity and having been in that role as a financial advisor, I would sit in meetings and about, you know, 60 percent of the time I'd be walking through and talking about the equity side of the portfolio and then I'd switch over to the fixed income side and well, Most of my clients would be like, yeah, that sounds great.
You just do whatever you want to. It was this glossed over allocation. It was something that just wasn't dynamic. I couldn't go to my neighbor's, uh, you know, party and raise my champagne glass and talk about the super exciting fixed income investment that I just made. Um, it just wasn't something, um, that, that had attraction, but 2022 really showed a light where many people had to start thinking about that 40 percent or whatever your allocation was because traditional fixed income became very complex all of a sudden. It wasn't offering the diversification that it had historically. It showed a double digit negative and now you're looking at, well, okay, we need to look at alternative investments within, you know, fixed income.
Now, as you guys stated earlier, There's lots of ways to skin that cat. There's tons and tons of different, uh, private credit options. Um, and I always believe people should diversify across, but in particular, we moved forward on real estate. One, because my, my, my partner came from real estate, had worked for better part of two decades in that space.
And it was just the thing that I was hearing over and over again from RIAs, individual investors. I really want to have principal preservation as a core focus, but I need to figure out what I'm doing on the fixed income side and I don't have to go out on the risk curve. And this was sort of that perfect fit where, great, I am running a portfolio of mortgages.
You are, we are all first lien full recourse. We have UCC equity filing against every single loan. So we have all the protections in place that were allowable and everything's backed by an actual piece of property that, you know, we generally run, you know, low LTVs. So this was that perfect opportunity for people to think about alternative fixed income and not have to question what are you really doing? It's really easy to explain what a bridge loan is. Um, it's not too, um, confusing and it was really easy to convert and talk to a number of people who had real estate, uh, background already, um, but you do need to be explicit because I, when I first came out the door and I said, oh, we're, you know, a real estate fixed income fund, um, people just ignored the words fixed income and just thought immediately I was doing something with equity.
So, okay. You know, if you're out there talking to clients and working through you really need to emphasize the fixed income side and make the real estate sort of that secondary comment, but it's a very opportunistic area across a lot of different venues. There's a, like I said earlier, there's single family residential private credit.
There's, uh, you know. We're on the commercial side. Um, and then the commercial side gets even more complex. And we chose a very particular niche that was fragmented, very inefficient. It was not receiving proper attention from any type of large capital providers. And that was what we sort of labeled the micro balance.
And really what that meant was we had to come up with a name. Different than small because in real estate, small can still mean a very, very large number. People are like, ah, you're writing $25 million loans, and we're like, no, we're, we're, we're writing those loans that are 200,000 to 1.2 to 1.3 million.
So we found this area where I can get in, I can do these bridge loans to people in secondary, tertiary markets, whether that's for workforce housing, or betterment of a lot of mixed use properties that we have right in sort of downtown areas of smaller towns that are 45 minutes to an hour outside of a gateway city.
Um, and just again and again and again, people are like, I cannot source money now. If you are operating in that inefficient space and one thing you need to, you know, assess as an investor is why, why is that opportunistic? Well, it gives me pricing power and it gives me contract power. Uh, I get to write my loan docs.
I don't have people coming back and renegotiating and I also really get to fit the price for the risk I'm taking. One of the things is we assess a lot of the risks between the property and the borrower and then we have an entire, you know, risk matrix that backs into what an effective price would be and what we want to get paid. And obviously there's an, a, a top down view to that. Also, you know, we don't want to lose out on good loans. So you can't just, uh, you know, price some absurd rate, but, um, you've got a lot of tailwinds right now in private credit, especially in real estate.
Um, as you guys mentioned, there's some trouble. Uh, anytime interest rates go up, equity generally has a valuation hit. Um, that's actually a tailwind. As interest rates go up, you're able to charge larger and larger rates, um, on private credit.
Richard Hillson: So, Chris, um, just a question there on that is that, to understand your strategy, is it, is it business loans in the traditional private credit sense for another purpose, which is secured against the, the assets that it's secured against is real estate, but the loans could be for equipment or any other purposes or working capital or whatever, or is it?
Chris Carsley: No, we actually, we actually only lend directly, uh, in first lien mortgages against the property. So some of our deals are direct purchases of property.
So people, most of our, uh, borrowers are, You know, smaller, uh, either individuals or smaller groups that are buying things for investment purposes, um, and, you know, why do you need a bridge loan or why would you pay a double digit for a bridge loan was one, uh, well, you need to get entry and two, this is an area that you know, most banks don't lend to, um, and if they do the, the ratios they need for stabilization are pretty strict and they've actually become even more strict, you know, over the last year and a half.
Richard Hillson: Let's have a look at some of the, um, the actual real examples here on, um, on this slide. Then you can talk us through kind of what this actually looks like with some, you know, some actual real world examples.
Chris Carsley: Yeah, no, um, you can see, you know, we lend, uh, nationwide, um, we source all of our loans from a broker network. Um, so they're out there finding deals and, you know, we see, um, 50, 60 million in a month, and we'll sort of narrow that down through our process to where, you know, we're doing, you know, three to five million, um, in a month in new loans.
Um, so, you know, we're, we're hammering pretty hard on, you know, the borrower and the property. We don't do, um, you know, cov-lites and no credit checks. Um, you know, our main competition is your hard money and your mom and pop lenders, but we're bringing more institutional process of where you know, we're doing a, you know, a full background check, tax transcripts, credit checks, you know, on borrowers, you know, previous buildings they might have owned and operated or they currently still own, you know, because we do have full recourse against them.
So we want to understand the depth of assets. We also want to understand their liquidity, what they're putting in. Um, so, you know, good geographic diversification, and we also want to run diversification across a variety of different asset types. Um, as you'll see, just recently, we just threw in sort of this new category we call, you know, retail office.
You'll see that we don't have any direct office. Um, Brock and I have never been a fan of office pretty much since we launched in January of 2020. Um, both of us have access to a number of people who are working for large corporations. And no one was going back and we were, why take the uncertainty and we had the deal flow to go into asset classes that were far more favorable, far more stable and had less uncertainty.
Um, we still don't see certainty in office. I'm not saying. you know, being an ex-hedge fund trader, listen, out of chaos, you can find some opportunities. So I'm not saying there's not opportunities in office, um, in a distressed situation. It's just not something that we're moving forward, you know, in this because we're, you know, we're not, we're not making that bet.
Um, so in some of the properties that we've gone into, I mean, you can see here, we've got, um, you know, in Paris, Texas, that particular building is, you know, and you've seen a lot of people converting, you know, the building might've been used for one case and they're doing a conversion. So, um, I'm sure some people out there have seen like motel conversions to multifamily.
Um, this was a mix of office and residences that were actually all put together and they are moving forward to, you've kind of taken the front look at that building where that's going to be an A converted smaller office, and then on the back end, they've got a number of different, uh, single, uh, you know, units that are all either already multifamily or they're converting to multifamily.
We love that trade. Um, these people can get in to these types of buildings for very, very cheap. Um, you know, a lot of people always ask, I'm based in Seattle and people ask, how many, how many loans do you do in Seattle? Zero. Um, one, it's usually outside of our loan size, and two, everyone's still trying to go for a premium, and you know, cap rates are not aligned.
The people that we have, we run through their deals, and they're usually double digit cap rates. These people have no problem coming in paying 12, 13, 14 percent for a bridge loan. Um, they're going to be in for 8 to 12 months when, you know, they're entering into a trade that's at a 14 cap. Um, and so you see, we, we love those conversions.
Um, we'll also do, um, sort of an owner occupied. You can see in Greensburg, Pennsylvania, um, very, uh, existing successful site. Um, They were already running a bar and restaurant. They're doing a small expansion to it. They couldn't get financing, had to go to private debt. We ran across them. It was something that we were able to put together, really afford, you know, and push forward that expansion for them.
But we dove in and looked at the financials across the business. Obviously, there again, understanding, you know, They're personal financials and running all their background checks. I mean everything just checked out in spades and so you might see in certain issues where our exit is not a Community bank or something like that.
That's you know, maybe you know The Paris, Texas property is going to be looking at as a takeout, you know, these guys can approach, you know SBA There's a lot of different ways that they can you know exit out of those type of properties Yeah, so I mean, you can see, you know, and once in a while we love self-storage, um, you know, it's, it's a, it's a great property class.
It's become a little bit of the favorite child as multifamily has taken a couple black eyes. Um, um, we, we love lending these. Um, this one was a great opportunity in Columbus, Ohio. Um, a little front office, a lot of existing, um, self-storage units, and here again, um, an ability for them to expand and add another, you know, you know, 15 to 20 different units, um.
And so we love that. We don't really do construction or, you know, lending. Um, so a lot of that money going in, you know, is usually for any kind of construction or rehab. A fair sum of it is actually supplied and goes to the equity, you know, from the borrower.
Richard Hillson: Excellent. And we, we need to move a little bit quickly along here, but, um, in terms of, um, the performance, we can see this is, this is pretty stable.
Um, whereas, um, because it is a, um, it's a, it's a yield play based on the debt in real estate, which evens out a lot of things when people, like you said, when people think about real estate, just the automatic is to go to the equity side of things. But as we can see here, um,
Chris Carsley: That's the key is sort of boring consistency.
I mean, that's what you're going for. Um, you know, we had to make to even make this chart even remotely entertaining. We had to break it down to the 10 basis point, you know, 20 basis point movements to show any difference. If you tighten it down anymore, it looks like a flat line.
