the big question is if they can’t exit to retail, who will they be exiting to.
in CRE it seems like no one wants to be equity, but everyone will be preferred equity or mezzanine debt, and without equity, there are no deals to lend money to
So I predict you’re gonna see equity being replaced by preferred equity or mezzanine debt, both of which act like equity relative to senior debt
This is a great analysis of the main issues. The distortion of the original form of organization (closed-end, success based compensation) into an asset gathering, high fee, access vehicle with illusory liquidity is the real issue. The industry will likely undergo a reorganization process similar to what front loaded, high cost mutual funds experienced after the ‘68-‘75 shakeout or the Wall Street model once fixed commissions disappeared and trading spreads declined by 95%. A high volume retail product should imply steadily declining fees and expenses, but the incumbent firms are currently extracting so much cash from the existing model that change will happen from the outside and only grudgingly.
Just remember no sharpe ratios in private CRE is a feature; not a bug. All kidding aside - you nail it with the comment on IRR, DPI etc. - these are all just ways to put together a puzzle. And most retail investors are not geared to understand/appreciate it -> lawsuits are inevitable.
the big question is if they can’t exit to retail, who will they be exiting to.
in CRE it seems like no one wants to be equity, but everyone will be preferred equity or mezzanine debt, and without equity, there are no deals to lend money to
So I predict you’re gonna see equity being replaced by preferred equity or mezzanine debt, both of which act like equity relative to senior debt
Dequity is the term I've heard...
This is a great analysis of the main issues. The distortion of the original form of organization (closed-end, success based compensation) into an asset gathering, high fee, access vehicle with illusory liquidity is the real issue. The industry will likely undergo a reorganization process similar to what front loaded, high cost mutual funds experienced after the ‘68-‘75 shakeout or the Wall Street model once fixed commissions disappeared and trading spreads declined by 95%. A high volume retail product should imply steadily declining fees and expenses, but the incumbent firms are currently extracting so much cash from the existing model that change will happen from the outside and only grudgingly.
I'm becoming an evangelist for closed-end drawdown vehicles 😃
Retail access to PE solves one problem and creates another. Liquidity expectations and illiquidity premiums don't stay in the same room for long.
A smarter solution for investor liquidity for funds might be using revolvers.
I dont mean a duel!
I am in a PE real estate fund that has no lockup (no restriction on exits).
They have a revolving line of credit to pay off exiting investors.
Their line of credit costs rate A while the fund is earning at a constant higher rate B.
Thus investors exit at a profit to the Fund!
Liquidity is provided to investors in a week under 1M and a month for over 1M.
My firm's fund is not overextended either so this works well for this un-distressed performing fund .
This would not generally work for overextended PE private credit funds with a flood of investors queuing up to exit.
Leyla knows of this firm whose initials are I.C.
The other fund we just exited from provides a limit of 5% of fund value may exit per
6 months. This is smart as well...
Just remember no sharpe ratios in private CRE is a feature; not a bug. All kidding aside - you nail it with the comment on IRR, DPI etc. - these are all just ways to put together a puzzle. And most retail investors are not geared to understand/appreciate it -> lawsuits are inevitable.