Commercial real estate has long been a popular investment among members of Tiger 21, a network of ultra-rich investors based primarily in the U.S. Many have made their fortunes in the sector, while those without could take advantage of low interest rates to finance the sale of buildings or leverage their investments to boost returns.
But rising interest rates, reluctant lenders and falling property prices have led to declining returns since 2022. As a result, many wealthy individuals are switching to lending cash to people who invest in buildings, rather than investing in the buildings themselves.
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“Loaning from a bank is not 'free' and it's not easy.” [to secure]”Real estate doesn't have the luster it once had,” explains Rob Fleischman, a tech entrepreneur and investor who serves as chairman of Tiger 21's Boston Group. “Returns are compressed and risks are rising, but in this interest rate environment it's more lucrative to lend to real estate developers and you can use real estate as collateral.”
Fleischman and others are part of a group of wealthy individuals who lend to a range of private companies, either directly or through specialized funds.U.S. family offices, which invest the assets of one or more ultra-high-net-worth individuals or families, will see their average allocation to private credit rise to 11% of total assets in 2023 from 8% in 2018, according to data provider Preqin. For European family offices, the share is growing to 13% from 9%.
The big attraction is that it is now possible to earn higher returns from activities that were previously hampered by persistently low interest rates.
“This is the first time in 10 years that we’ve been able to achieve annualized yields of 10-12% on senior secured first lien credit. [to] “We invest in high-quality, profitable companies,” says Nancy Curtin, chief investment officer at Alti Tiedemann Global. This type of loan is considered the lowest risk because it must be repaid before other debt. Tiedemann's wealthy clients, most of whom are based in the U.S. or Europe, have between $25 million and $1 billion in investable assets, totaling $49 billion.
But another important change is increased liquidity, thanks to a series of new open-end funds launched in recent years by big alternative investment managers such as Blackstone, Ares Management and Apollo Global Management that offer investors an alternative to the traditionally dominant closed-end funds that can tie up investors' money for years.
Thibaut Sandre, head of private debt research at bfinance, a U.K.-based consultancy that advises family offices and institutional investors, estimates that more than 40 open-ended funds have been launched in the past three years, “and the number is growing every month,” he added.
Daniel O'Donnell, global head of alternative investments at Citi Global Wealth in Boston, emphasizes the benefits. “Typical closed-end direct lending funds have a term of six to 10 years,” he says. “The funds we're focused on today are [for investors] There is quarterly liquidity.”
This is the first time in a decade that senior secured first lien credit has been able to achieve annualized yields of 10% to 12%. [to] A high-performing and profitable company
Large fund managers typically offer both closed-end and open-end funds, the former offering higher returns in exchange for longer lock-up periods.
But for more experienced investors, including many members of Tiger 21, direct lending agreements negotiated individually with companies can yield even higher returns.
“For newer investors, open-ended or semi-liquid funds offer a way to get started,” says Sky Kwah, director of investment advisory at Singapore-based Raffles Family Office. “For more sophisticated investors looking for more direct involvement and control over their investments, direct private credit transactions offer an attractive opportunity.”
But investors entering the space must balance risks and rewards: The quarterly liquidity that open-end funds offer doesn't match the multiyear terms of loans, and funds risk halting withdrawals if too many investors ask to redeem at once.
“The market is still young, so this is still untested,” Sandretto noted.
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Kwa also warns that the level of risk may not be clear. “Private credit is less transparent as it typically involves lending to unrated or unlisted companies,” he says. Still, Raffles Family Office has increased its allocation to the area in recent years.
Leverage – funds that borrow money to make loans – also increases risk: A 2023 survey of 58 large private credit funds by Cliff Water, a U.S. alternative investment adviser and fund manager, found the average leverage level was 112%. “This can amplify volatility and lead to increased losses, especially in a fluctuating interest rate environment,” Kwa says.
Then there are the fund manager's fees to consider, which are relatively high, averaging 3.94% of total assets, according to Cliffwater research.One reason Tiger 21 investors prefer direct investing is because they believe they can find the best lending opportunities themselves.