Understanding Collateralized Securities in Real Estate Credit Funds
On the Wonders of Financial Engineering
What’s common between KKR’s Real Estate Finance Trust, Cerberus Funds, Blackstone Mortgage Trust and many other publicly-traded and non-listed credit funds?
If you guessed “collateralized securities”, pat yourself on the back, scroll three paragraphs down and take the quiz. I’ll be asking you about the difference between CLO and CMBS, A- and B-pieces, and for extra credit, you can tell me about Freddie Mac’s K-Deal program. I’m kidding, no quiz today.
*For those of you who buy commercial real estate, this article will explain why CMBS loans generally have higher underwriting standards.
If you have no idea what I’m talking about, but feel the need to learn so you can dazzle your dining companions, read on. I’ll make it simple, I promise. Once you understand how collateralized securities work, you won’t be shocked when you see things like this:
This is financial engineering, in its purest form. Are collateralized securities better than regular loans for investors? No. The risks that come with them may not be immediately obvious, but it doesn’t mean they are absent.
YOUR JOB as an investor is to understand how this works, spot it in financial statements (I’ll give you examples), and assess whether you are sufficiently compensated for the risk. Speaking of which, here’s an article on signs of distress in private credit funds:
Ours is the only voice on private markets from the LP seat: without your support, it’ll be drowned out by the million-dollar marketing machines of the likes of Blackstone. And who else is going to tell you about the curious things they do on loan renewals?
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