Private Equity Vs Venture Capital. Similar but really quite different.

It’s more than sixty years since the birth of the Private Equity (PE) and Venture Capital (VC) industries, where both have evolved into ubstantial pillars of the investment landscape since their humble beginnings in the 1950’s.

While both sectors are now fairly mature, it remains surprisingly commonplace for business owners to use the terms PE and VC interchangeably. In concept, both are vehicles for capital to flow into private companies with the expectation of returns that beat the public markets, but the differences between these asset classes far outnumber the similarities.

In this short reading you will get an introduction to the two investment classes, and if you’re thinking of raising investment for your company the knowledge you’ll gain will help you to understand where you fit into the corporate finance landscape - and what you might want to think about when you pitch your business to GP’s (you’ll learn more about GP’s and LP’s shortly!).

Property Top Co-Financing

Through 2017 we have worked with clients and joint-venture partners on an array of development projects, and whilst most of these have involved us raising development finance & equity for clients, we have also had a number of inquiries for capitalizing fast-growing property development firms at the corporate, or Topco, level. This objective raises a number of questions, both for the development firm and for the investor side.

There is certainly a preference for the majority of funders to appraise and support developments on a case-by-case basis, as when money is ring-fenced and deployed it begins accruing returns (IRR) obligations from the outset. In the mid-size development space, it’s generally more efficient for money to be attached to a single, identified asset, for measurable anticipated results. Accordingly, a good deal of the money that supports those mid-space developments adheres to this funding philosophy.

When funds are being requested at the Topco level, for discretionary use across a broader portfolio of developments/projects, a funder must accept a less precise – and essentially more aggregated – investment dynamic, with generally a longer timeline and a more variable risk profile. Many funders in this mid-size development space opt for a case by case funding model as it allows them to manage their portfolio risk more directly.
Equally, from the perspective of the property firm, the question must be addressed with respect to why they really need or want Topco investment. Doing this will often result in giving away a solid stake in their business, and more poignantly – if the business doesn’t have the equity or asset base to support portfolio-level development, is it really the right time to ask someone else to take the equity risk? The answer may well be yes, and for experienced, niche operators we have seen solid interest from larger funding offices to support that growth – though not without addressing the above line of questioning.

To discuss financial structures to suit your development pipeline, call us on 07718 966556 or email enquire@axialcapital.co.uk

World-class in access to private equity & venture capital

Policy, infrastructure, education, and general ‘attractiveness’ to private equity and VC investors – that’s a description recently applied to the UK in an international evaluation of funding & investment activity.
 
That doesn’t come as a surprise to me in light of the current levels of both equity and debt funding we have access to for commercial and residential property developers. Notably, the value range has remained as strong as ever, with appetite holding at the £5m+ level for the most part, and a draw toward equity stakes and levered returns giving developers as much choice as ever.

 

Furthermore, medium-term horizons are being maintained, with capital for the development of operating assets (care-homes and the like) still looking at 3yr+ tie-ins.

Corporates continue to hedge their bets on the forward-looking operating environment inside/outside the EU, with apparent proclivity toward maintaining some degree of presence in the great city of London whatever the outcome. We continue, positively

 

Putting capital together for property developers

Increasingly when we structure a finance solution for property developers at £2m+ we are drawing on our equity partners to get the client across the line on the overall project funding.
 

As much as people may tout 100% finance (and yes, this is possible – if a very thorough business case is made), the reality is that any investor would prefer to see a developer make some show of financial involvement (just a few percent in many cases) to build a partnership for doing more business together in the future. And this is how we approach business when we source funds for developers – which has had the positive effect of bringing more funding partners to engage with us.
 

The right capital stack is about achieving balance – both in terms of returns and security for investors, and in terms affordability on the cost on the money overall – and we’re seeing this being achieved for more and more developers on some really great developments.

A case-study of development finance cross-collateralisation

Over the past 6 months something we’ve had requests for, on a number of occasions, is cross-collaterised development finance facilities, where developers will undertake a number of separate developments – but they want a pre-agreed funding arrangement to cover all the proposed sites. The facility size in each case has been in the region of £3m – £5m.
 

Positively, we’ve structured good solutions to each of these. In the case of multi-site residential projects we’ve seen good support with well-priced debt funding and even profit-participation agreements, and; on commercial developments with good tenant pre-commitments the joint-venture equity funding lines have been quite attractive.
 

All in all it suggests the positive market metrics, such as the recent RICS growth predictions, are carrying through to the marketplace – and to the developers we provide structured finance for.

Implementing property bonds into funding structures

This year we have been evolving our funding models to provide development finance for UK property projects, not only via secured debt facilities and private equity placements, but more recently with the use of property bonds. The question becomes one of choice and suitability, as costs and timing are key considerations when deciding which type of funding to employ.

We recently arranged a property bond for a hotel joint venture, where the property already existed and had a tangible value, but had upside potential via a schedule of improvement works and operational streamlining – if the client had the funds to acquire the site. Whilst being set up as a joint venture, it wasn’t feasible to deploy private equity investment due to the extended timeframes required for improving and enhancing the operational position of the hotel. Accordingly we structured a first charge property bond to allow a 3yr horizon for an exit or refinance of the property – giving investors a secure asset backed medium term investment, and at the same time giving the hotel company access to capital to acquire and improve a core operational asset.

To discuss funding models suitable to projects across the UK, we invite you to look over our website at www.axialcapital.co.uk or to contact us directly on:

+44 (0)7718 966556 / enquire@axialcapital.co.uk