Landmark Links February 23rd – Crowding Out


Lead Story… One of the reasons that it’s so difficult to maintain a successful investment track record based on a single strategy is that success begets imitators.  Oftentimes a manager will find a successful niche and exploit it, only to have that niche vanish once others catch on and flood it with money, making it much more challenging to find good opportunities from a risk/reward standpoint.  One market segment where this has been happening of late is private equity where great returns have led to a massive influx of capital, making it difficult for even the best investors to find compelling deals without using extremely aggressive underwriting.  Another is commercial real estate bridge lending.  Over the past few years, bridge lending has been one of the best spaces in the real estate market to earn a solid return in senior secured position.  Perhaps just as importantly, it allows the lender to do so with loans that are outstanding for a relatively short period of time.  The early lenders in this space did extremely well and money has come pouring in over the past couple of years.  Carrie Rossenfeld of Globe Street chronicled this new environment in a story based on one of the bridge panels at MBA CREF.  From Globe Street (emphasis mine):

Daniel Baker, EVP of KeyBank Real Estate Capital, said with more entrants into the debt space, the market has become more competitive, and Jeff Friedman, co-founder of Mesa West Capital LLC—which is in negotiations to be acquired by Morgan Stanley—agreed, saying “I wish everyone would leave my block—I was there first!” He said his firm had a “lemonade stand” that was profitable, and now there are 40 “lemonade stands,” so his company’s visibility is horrible. Why have all these new funds emerged? “The search for yield by institutional investors, and the fundamentals of this space have been great. Current income and downside protection is what debt funds can offer, and the flood of capital is driving down costs.”

Baker said banks are struggling for loan growth and are fighting competitors on pricing, not on underwriting standards, and Friedman said life companies are also growing in the debt-fund space.

Mark Williams, managing director for Eastdil Secured, said the makeup for debtors hasn’t changed much, but competition from debt funds is tightening spreads.

Friedman pointed out that before CMBS, borrowers would borrow from life companies and the S&Ls. Defeasance was a brand-new concept—a new vehicle for the ecosystem—that grew, and “you had to convince people it was a safe and sound vehicle.” Now, the convergence is similar. “The global financial crisis changed everything, and we’re all diving in to fill the gap.”

Moderator Byron Boston, president, CEO and co-investment officer for Dynex Capital Inc., asked the panelists about the impact of foreign capital on the market, and Williams said the foreign-capital flow into the debt-fund space is enormous since the yield is greater in the US debt markets than in foreign markets. “The global search for yield has led to the US debt market.”

We have heard this same story from capital sources lately.  Everyone is searching for the holy grail of high yield and short maturities in a senior position.  For example, a senior employee at a large bond fund told one of my partners a couple of weeks ago that the bridge space is one of the segments of the market that they are most bullish on in light of the rising interest rate environment.   However, the secret is out and lenders appear to be in a race to the bottom in order to win the most coveted deals based on pricing.  In other words it’s a great time to be a borrower looking for a bridge loan but perhaps not a great time to be a lender in an environment where competitors – many of whom have a cheaper cost of capital – are sprouting up daily.  However, that’s the downside to finding a strategy that works so well – it almost never lasts forever.


No Way Around It: Estimating recession risk is incredibly complicated and requires a large array of indicators – not cherry-picking of individual data points.  Anyone who tells you otherwise should be put on ignore.

Glass Half Full: Equity investors appear to be ok with ten year Treasury yields approaching 3%……..for now.

Not Just Here: Household debt is booming across the globe yet regulators appear to be better prepared to handle it than they were 10 years ago.


Have it Both Ways: Seattle managed to cut car commuting downtown while adding 60,000 jobs by making a major investment in mass transitSee Also: California is going to have to get a lot better about investing in transportation infrastructure in order to get more housing approved (side note: this means city transit that people will actually use, NOT a bullet train from nowhere to nowhere).


Why We Can’t Have Nice Things: A 75 unit housing development in San Francisco is facing a potential multi-month delay because some NIMBY activists claim that a 1990s vintage laundromat currently on the site has historical significance.


Sustainable Business Model: Snap’s market value tanked by $1.3 billion thanks to one tweet from Kylie Jenner. So, in summary, a 20-year old who is famous mostly because her sister made a viral sex tape tanked the market cap of a company that came to prominence by offering a way to automatically delete dick picks by over a billion dollars with one tweet. What a time to be alive.

Trees Don’t Grow to the Sky: Private equity’s out-performance of most other investment strategies has led to a lot more cash being allocated to the space.  This, in turn makes it more challenging to find deals that will result in the aforementioned market-beating returns.

Sign Me Up:Subscription service revenue is becoming an increasingly important base of recurring revenue for big tech companies.

So Bad, It’s Almost Good: Meet Elizabeth Swaney, the world’s worst Olympic skier who took advantage of several loopholes to compete in the women’s ski half-pipe for a country that she isn’t from without attempting a single trick.

Chart of the Day

Saying that the startup environment in the US is soft would be a dramatic understatement.

Source:The Wall Street Journal


All About Perspective: A San Antonio man tried to overturn his 4th DUI conviction – resulting in a 4-year prison sentence – by arguing that Texas’ legal limit on intoxicated driving discriminates against alcoholics.  Shockingly, he was unsuccessful.

Happy Ending: China has launched its latest crackdown against a phenomenon which just won’t seem to die in rural areas – funeral strippers.  I’ve read this story like 5 times and still can’t figure out what the problem is.

Obsess Much? People are using avocados to propose on Instagram because Millennials.

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