How Savings Rates Have Impacted Return Projections For Private Placements - podcast episode cover

How Savings Rates Have Impacted Return Projections For Private Placements

Jul 24, 20236 min
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Episode description


If you’ve been looking at investment decks lately, you might have noticed a typical return structure popping up more and more. In this post we’ll talk about how savings rates have influenced private placement returns & deal structures.


Key Highlights:

[0:47-1:46] Savings Account Rates Influence Real Estate Returns: Historically, savings account rates have been low, ranging from 0.01% to 0.2% from 2009 to 2020. However, since interest rate hikes in 2022, savings rates have increased, with some high-yield savings accounts offering up to 5% returns. This increase in savings rates affects how real estate operators structure their returns when the Federal Reserve raises the federal funds rate.


 [2:37-3:28] Investor Decision-making: The higher savings account rates create a dilemma for investors. They now have the option of investing in a 100% liquid and safe savings account with a 5% return or a private syndication or fund projecting a potentially higher return, let's say 15%, but with a certain level of risk and illiquidity. Investors must decide if the additional return from the private investment is worth the additional risk compared to the safety of a savings account.


[4:36-5:00] Impact on Deal Structures: To remain competitive with savings account rates, real estate sponsors have been forced to raise their preferred returns. Preferred returns are the percentage of upfront cash flow paid to investors. To strike a balance and attract investors, sponsors have introduced new hurdle structures, such as increasing preferred return projections by a point or two while adjusting equity based on Internal Rate of Return (IRR) achievements. For example, a sponsor might offer a 7% preferred return and 70% equity to investors until a 15% IRR is achieved, and then split equity 50-50 thereafter.

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How Savings Rates Have Impacted Return Projections For Private Placements | Passive Real Estate Strategies: Investing in Syndications and Funds podcast - Listen or read transcript on Metacast