WHY PRIVATE CREDIT
A once-in-a-decade
lending environment
Rapid interest rate rises destabilized markets, leading to broad dislocations, increased strain across the system, and liquidity pressure that presents a risk to the global economy. Simultaneously, those same factors have combined to create what we believe is arguably the most attractive environment for credit investments in a generation.
What is private credit?
Private credit (or private lending) is an asset class consisting generally of loans, fixed-income, or other structured investments that aim to deliver higher yields with lower overall risk when compared to equity investments. Investors in private credit lend money to borrowers in exchange for a fixed rate of return — often captured as an interest rate or preferred return — but typically do not take equity ownership or upside participation. Because it is illiquid, private credit aims to deliver a higher relative return than publicly traded credit such as bonds or asset-backed securities.
The profitability of preparation
When short-term borrowing becomes more expensive than long-term borrowing, it is an unnatural state of affairs — one that creates the liquidity crunch we call The Great Deleveraging. During this period, individuals and companies seeking to borrow money, especially in the near term, are forced to do so at significantly more favorable terms for investors. Higher interest rates generally mean borrowers borrow at much lower leverage — which means lower risk. Maturing loans require paydowns, and the gap between expected and actual proceeds frequently requires “bridge” or “mezzanine” financing.
Meanwhile, investors who have been diligent and maintained larger cash positions are in the enviable position of being able to demand significantly more return in exchange for providing liquidity during what we expect to be a temporary period of realignment. Meridian Equity Group is in that position.
Important note: in our experience, these types of unique investing environments are short-lived.
OUR TRACK RECORD
Billion-dollar experience
While this strategy is newly calibrated for the current environment, we draw on a deep well of executional experience. Since 2012, we've acquired or financed over 37,000 residential units and have made more than 71 unique mezzanine and preferred equity investments, collectively worth more than $7 billion.
ABOUT OUR STRATEGY
Market dislocation creates opportunity
Nearly every borrower and every asset — regardless of credit quality — is impacted by the Great Deleveraging. As loans mature and come due, a gap is created during the refinancing period where new equity capital must come in to pay down the overall size of the loan.
Funding the gap
Our strategy is to focus on bridging the funding gap and providing rescue capital to borrowers in the midst of the liquidity crunch. By lending into the gap, we are able to invest at a healthy margin of safety, concentrating on high-quality assets with creditworthy borrowers — those experiencing circumstantial liquidity needs as a result of rapidly risen rates. Most frequently, the borrower is in the middle of a business plan to enhance the value of the property — new construction, renovations, or lease-up — and simply needs more time to reach stabilization and be ready for long-term, fixed-rate debt.
Examples of this kind of activity
- Originating and structuring real estate loans, including senior mortgage loans and subordinated mortgage loans
- Providing mezzanine financing in the form of preferred equity, B-notes, or second trusts
- Sizing mezzanine or preferred loans to a GSE (e.g. Fannie Mae or Freddie Mac) exit
- Financing residential construction and development
- Acquiring subordinate notes and high-yield investments in the asset-backed securities market — single family rental portfolios in particular
Focusing on the markets we know best
We primarily target high-growth Sunbelt markets like Dallas-Fort Worth, Phoenix, Orlando, Tampa, Houston, Atlanta, Charleston, and Las Vegas. These are the markets we know best: approximately 70% of our recent acquisitions were in the four fastest-growing states — Texas, Florida, North Carolina, and Georgia — and more than 90% were within the Sunbelt.
By maintaining rigorous credit underwriting with a heavy emphasis on residential rental properties, we believe we have the opportunity to achieve some of the best relative risk-adjusted returns since the aftermath of the Great Recession.
EXAMPLE PROJECT
Waypoint
As part of our private credit strategy, we've invested roughly $20.8 million to provide financing in the form of preferred equity for the development of a 300-unit multifamily community on 65.4 acres of centrally located land in Daytona Beach, Florida. Under the terms of the investment agreement, the borrower pays a 13.5% fixed annual rate that accrues for as long as it takes to finish the project, with our investment repaid upon completion.
We work with a majority of the top banks, sponsors, and capital brokers in the market, and have established a reputation as a good partner — importantly, one that is not a “loan-to-own shop” seeking to prey on distress. As a result, we've become a sought-after capital source with a robust pipeline of deal flow tailored to this type of opportunistic lending.
Partner With Us
To learn more about Meridian Equity Group's private credit strategy and current opportunities for income-focused investors, we would be glad to hear from you.
Contact Our Team