Private debt activity is growing. While banks, institutions and the agencies are taking a bulk of the pie, private lenders are filling a void for small and mid-sized operators. To find out more about this activity, what is driving private debt and to get an outlook on private capital activity this year, we sat down with Brendan Miller, chief investment officer at Thorofare Capital, for an exclusive interview.

GlobeSt.com: What role is private debt play in the capital markets today?

Brendan Miller: Private debt is fulfilling a void in the capital markets, particularly for the benefit of smaller and mid-sized real estate operators as traditional banks have focused on servicing larger borrowing relationships. The primary role of private debt is to provide capital to bridge a Borrower through their business plan, which can include a renovation, repositioning through new or active management, or even a bridge to sale.

GlobeSt.com: What is driving private debt activity?

Miller: A number of factors are driving private debt activity including CMBS maturities, varying transitional business plans, and limited guarantor financial wherewithal. But of the drivers, the most common for those Borrowers in the High Yield space is a quick close timing requirement as a result of a pending maturity or one driven through an auction platform, which is gaining in popularity. Additionally, we have seen a nice rebound in the CRE CLO market, which has created additional liquidity in the market. This has resulted in more competitive terms for floating rate bridge loans. This further has been compounded by too much capital changing too few deals. Lastly, institutional bond buyers have been eager to deploy capital and invest in the securitization markets, which has further increased market competition in terms of interest rates.

GlobeSt.com: What is this debt focused on, and why?

Miller: CRE debt funds are focused largely on value added investment strategies for business plans being completed in 1-3 years. This can include an apartment investor renovating a tired building or a hotel operator changing the flag to a more appropriate brand.

GlobeSt.com: What are the benefits and challenges of private debt?

Miller: The biggest benefits to private CRE debt is more flexible and creative loan structures, which may include non-recourse, prepayment flexibility and shortened diligence and closing timelines. Conventional bank lenders will require longer lead times to close transactions as well as substantial pre-payment requirements.

GlobeSt.com: What is your outlook for private debt activity this year?

Miller: For 2018, private debt will play an ever increasing role in the real estate capital markets as banks continue to tighten their underwriting and credit requirements so long as HVCRE guidelines continue to exist. The good news for borrowers is that they will see more competitive terms as more players who are chasing yield enter the private debt space. We also anticipate to see more situations where Borrowers have experienced delays or cost over-runs in their business plans and will need additional funds and time via a bridge loan to fully execute their plan. Also, as cap rate compression has leveled out, successful value-add plays will rely on reasonable equity investment and bottom line cash flow growth in order to refinance into conventional financing.

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Why Private Debt Activity Is Growing

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