Leverage loans are a common strategy used in real estate financing to generate higher returns for investors.
In a typical capital structure, equity investors are looking to earn a certain rate of return, let's say 15%.
To maximize their returns, they leverage the property by taking out a loan, typically around 65-70% of the property's value.
The interest rate on this debt can vary, but in today's market, it might be around 6.5-9%.
When a senior lender provides a leverage loan at a higher interest rate, such as 8.5-9%, they are able to generate higher returns on their investment.
This is because the interest they earn on the loan is higher than the cost of borrowing the funds.
In other words, they are earning a spread between the interest rate they charge on the loan and the interest rate they are paying on the funds they borrowed to make the loan.
In this episode of Tech Equity and Money Talk, Michael Episcope from Origin Investments discusses the rise of credit and debt funds in the private equity market.
He explains that these funds invest in a part of the capital structure that's more protected than equity, aiming to provide stable income through yield.
Listeners are advised to be cautious of inexperienced managers rushing to invest due to the pressure of closed-end funds.
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Listen to the full episode here:
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YouTube:
https://youtu.be/0mNWbvETv5U
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Audio Podcast:
https://www.techequityandmoneytalk.com/debt-and-credit-funds
