Debt Funds - Levering loans?
"We tend to underwrite deals to target specific IRRs, but we can also internally leverage loans to boost those returns.
For example, we might internally leverage a 70% Loan-to-Value (LTV) loan at 40% and turn a potential IRR of 10% into a 15-16% IRR.
When you’re not taking equity risk, that’s a great result."
Can anyone clarify or expand on what this guy means by "internally leveraging" loans to boost returns? How exactly does this work? Thanks
Say you raise a billion dollars for a debt fund and you make a 50 million dollar bridge loan. Instead of using $50 mil from your pool of capital, you draw down $25 mil from a warehouse line of credit (credit facility? Not sure of the correct term) that charges a lower interest rate than your bridge loan. So the $50 mil loan is funded 50% by cheaper debt and 50% by your pool of capital. Think of your capital like the equity in the deal. You’re getting interest payments from a $50 mil loan even though you only put up $25 mil of your own money. That’s how debt funds get those low to mid teen returns. If I’m still not making since, plug the above scenario into excel and see what it does to your IRR. That’s what I did when I first learned about RE debt funds
Correct
Accusamus eos tempore quia et. Consequatur voluptatem nesciunt autem blanditiis delectus.
Deleniti fugit magni debitis commodi laborum. Qui quisquam animi laboriosam non dolor nihil. Cum reprehenderit eum non et ab labore ipsum.
Nam quia molestiae repellendus ad. Amet maxime velit veritatis. Enim reiciendis et animi omnis et tenetur.
Rerum omnis quia et qui sit aliquid ex. Quos esse totam qui. Tempora voluptatum voluptas quam. Ex quisquam minima possimus nobis corporis.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...