For years, commercial property was a popular investment among the members of Tiger 21, a network of super-rich investors, based mainly in the US. Many had made their fortunes in the sector — and even those who had not could take advantage of low interest rates to finance buildings to sell on, or boost their investment returns through leverage.
But, since 2022, higher interest rates, more reluctant lenders, and falling property prices have all eaten into returns. As a result, instead of investing in the buildings themselves, many wealthy individuals are now switching to lending cash to those who do.
“Now that borrowing from the bank isn’t ‘free’ and isn’t easy [to secure], real estate does not have the shine it had before,” explains Rob Fleischman, a technology entrepreneur and investor, who is chair of Tiger 21’s Boston group. “Returns are compressed and risk is higher. But being the lender to real estate folks is better in this rate environment and you get the property as collateral.”
Fleischman and his peers are among a growing group of rich individuals lending to a range of private companies, either directly or through specialist funds. Among US family offices, which invest the wealth of one or more very rich individuals or families, average allocations to private credit increased from 8 per cent of total assets in 2018 to 11 per cent in 2023, according to Preqin, a data provider. Among family offices in Europe, the proportion increased from 9 per cent to 13 per cent.
A big part of the draw is the higher returns now available from an activity once hobbled by persistently low interest rates.
“This is the first time in a decade that we have been able to get annual 10 per cent to 12 per cent returns for senior secured, first lien credit [to] excellent and profitable companies,” says Nancy Curtin, chief investment officer of AlTi Tiedemann Global. This type of lending is considered the lowest risk, as it must be repaid first, before other debts. Tiedemann’s wealth clients are mostly based in the US or Europe, have investible assets of between $25mn and $1bn, and collectively account for $49bn.
But another crucial change has been improved liquidity, thanks to a raft of new open-ended funds launched by large alternative investment managers like Blackstone, Ares Management, and Apollo Global Management in recent years. These offer investors an alternative to the traditionally dominant closed-ended funds, which lock up investors’ money for years.
Thibault Sandret, head of private debt research at bfinance, a UK-based consultant that advises family offices and institutions on their investments, estimates that more than 40 open-ended funds have launched in the past three years. “And the number keeps growing every month,” he adds.
Daniel O’Donnell, global head of alternative investments at Citi Global Wealth in Boston, emphasises the advantages. “A typical closed-ended direct lending fund would have a term of six to 10 years,” he says. “The funds we focus on now [for investors] have quarterly liquidity.”
Leading fund managers typically offer both closed-ended and open-ended funds, the former providing higher returns in exchange for longer lock-up periods.
However, for more experienced investors, including many members of Tiger 21, individually negotiated direct lending deals with companies can offer even higher returns.
“For entry-level investors, open-ended or semi-liquid funds provide an avenue to dip their toes,” says Sky Kwah, Singapore-based director for investment advisory at Raffles Family Office. “For sophisticated investors seeking more direct involvement and control over their investments, direct private credit deals present an enticing opportunity.”
Investors entering the sector must balance the risks against these rewards, though. The quarterly liquidity offered by open-ended funds does not match the duration of their loans, which have multiple-year terms, so there is a danger of funds suspending withdrawals if too many investors seek to redeem at once.
“The market is still young so this hasn’t been tested yet,” points out Sandret.
Kwah also warns that the risk level may not be obvious. “Private credit typically involves lending to unrated or unlisted companies and is therefore less transparent,” he says. Even so, Raffles Family Office has increased its allocation to the sector in recent years.
Leverage — funds borrowing more money to make loans — adds risk, too. A 2023 survey of 58 of the largest private credit funds by Cliffwater, a US alternative investment adviser and fund manager, found they had an average leverage level of 112 per cent. “This can amplify volatility, especially in fluctuating interest rate environments, potentially leading to increased losses,” says Kwah.
And then there are the fund managers’ fees to take into account. These can be relatively high — an average of 3.94 per cent of total assets, according to the Cliffwater survey. That is one reason the investors at Tiger 21 favour direct investment: they reckon they can find the best lending opportunities themselves.