By Charles Clinton
Recently, there's been increased interest in debt and credit investment products from all kinds of investors.
A lot of that has to do with where we are in the cycle and the availability of substitutes. The prolonged period of low interest rates means more than just anemic yields on savings accounts: the low cost of borrowing has gradually pushed down yields across the market as investors search for opportunities.
Many equity values are high and finding equity opportunities that offer compelling upside compared to risk is simply more challenging than it was even a few years ago. Meanwhile, volatility has been more and more prevalent in public equities markets, and investors are keen to allocate toward investments that are less correlated to the public markets and offer diversification and some form of structural risk protection.
Private-market real estate can potentially help investors mitigate exposure to systemic risk and offer returns that are less correlated with public markets than public REITs.
Interestingly, while we do see pretty universal demand for debt and credit products, the reasons (at least anecdotally) tend to be a bit different for younger accredited investors vs. older investors who are at or nearing retirement.
For the younger end of the accredited investor spectrum, investors tend to qualify as “accredited” based on high current income (and, correspondingly, these investors tend to possess relatively modest net worth, as compared with older accredited investors). To be specific, I’m talking about a 35-year-old doctor, say, four years out of residency; or an associate at a law firm, six years out of law school. These younger investors tend to be more interested in actively managing their money and are starting to explore alternative investments as they think about portfolio construction and diversification. While this is typically the profile of an investor with higher risk tolerance, they are also looking for an easy access point into alternatives - low minimums, short or medium duration, income-producing and backed by real estate. For investors with more risk tolerance looking for a higher return, preferred equity products have proven popular, as they have features of both debt and equity.
On the flip side, older investors - generally with larger portfolios - find debt and credit products appealing as a means of supplementing existing income-producing investments with fixed-rate, short-term or medium-term assets that offer payment priority. This demographic of accredited investors tends to be most focused on preservation of capital, so the structural protections of debt, particularly first lien mortgage debt, are appealing.
Charles Clinton is Co-Founder & CEO of EquityMultiple.