30th August 2018
How boutique advisors ply their trade
Independent debt advisory shops navigate the small-to mid-sized loan market for clients, finds Lauren Parr.
The most high-profile consultancies might attach themselves to Europe’s largest, marquee real estate lending deals, but the bread and butter for many debt advisors is small- to mid-sized financing transactions.
Boutique firms, ranging from one-person brands to small teams, are hard at work – many located in London, but also across Continental Europe’s larger cities. Some find themselves arranging deals below €10 million, while others focus more on the ‘mid-market’, which is broadly defined as above that mark and up to €50 million.
“It’s a big market; a lot of borrowers are buying assets of that size in the UK and Europe,” says Richard Fine, principal at Brotherton Real Estate, a four-strong advisory practice which set up shop in London in 2014.
Such firms serve borrowers which do not have the in-house finance expertise boasted by larger-scale investors, choosing instead to outsource capital-raising. The bulk of clients, niche advisors explain, tend to be private property companies, family offices, high-net-worth individuals and smaller-scale developers, as well as a handful of institutional clients such as wealth managers, hedge funds and smaller private equity funds. Advisors sell to clients their ability to navigate a wider lending market than many are used to.
“In 15 years, we’ve never seen this fluid a market, with lenders coming in and out all the time,” says Adam Buchler, co-founder of London-based BBS Capital. “To stay on top of who’s out there and what’s on offer in the wider market beyond your own lending relationships is a full-time job.”
Most of an advisor’s time is spent out of the office meeting the increasing number of active lenders, as well as potential and existing clients. “We are often approached by new entrants into the market who say they would have liked to have pitched for a loan we have arranged. It’s our job to find out who is actually committed; some new lenders want to see a lot of product so talk a big game but might not be quite ready to transact in the time frame we require,” says Buchler.
Sourcing loans has also become more challenging for sponsors, with valuations under increased scrutiny and lenders exercising caution in parts of the market such as residential development. Not all debt providers can be relied on for a quick answer.
“Pre-crisis we knew the profile of each lender; today, there is a tremendous amount of inconsistency,” explains Morris Rothbart, founding partner of Manchester-based advisory firm Seaford Finance.
“It has become a real strain. Although each lender has a policy in place and we broadly know where the land lies, we have seen a new phenomenon in the past six months whereby we have been let down by a number of institutions on separate transactions,” Rothbart adds.
In one instance, the lender reduced the amount it was prepared to lend from £10 million (€11.3 million) to £8.5 million on the day of draw-down. While only a 7 percent to 8 percent change based on the scheme’s gross development value, the borrower was unhappy about needing to put additional upfront cash into the deal. “Understanding which banks are reliable has become an important part of a transaction,” Rothbart says.
Brotherton is building technology to track lenders’ offerings. Fine explains the database will allow it to identify trends and which lenders offer the best terms in a particular type of transaction, based on pricing in previous deals.
“Most of the time we don’t run huge processes; we might approach five or six lenders for a particular deal, which means the lenders we’re talking to know they’ve got a good shot of winning a transaction and we can secure better execution and terms,” says Fine.
Helping small- and mid-market clients understand what is financeable in the market is a key part of the job. For example, many sponsors of smaller schemes are grappling with the impact of retail uncertainty, since there is usually a retail component to assets they focus on.
“If you’re building 150 to 200 flats, for example, there are going to be commercial units on the ground floor. Tesco or Costa will take the space, but it’s affecting valuations because no one wants to do a pre-let while the market is struggling,” says Rothbart. “Negative pressure on retail is only adding to what is already a challenging working environment.”
BBS’ Buchler agrees: “If a borrower expects a high street bank to finance a retail parade that includes a questionable tenant at high level leverage and low pricing, they’re going to struggle. It’s an advisor’s job to help them manage their expectations.”
How lucrative the small- and mid-market is for debt advisors depends, according to Fine, on “how good you are, how much you can raise and the number of deals your close.”
“We’ve always aimed to have fewer clients that we do everything for, from underwritings a debt package through to draw-down,” he continues. “We want clients to see the value we add as opposed to clients coming to us with a term sheet asking if we can beat it; anyone can do that.”
As is the case with big-ticket deals, fees are typically calculated as a percentage of debt raised, with the size and complexity of a deal and the volume and frequency of business for a client also taken into consideration. “It takes the same effort to do a £3 million development facility as a £30 million development facility,” Rothbart notes.
Development finance can be a major component of small- and mid-market advisors’ business, with vanilla investment deals less frequent. “Properties have aged to a degree that they need redevelopment, yet institutions aren’t taking that level of risk. Ultra-high-net-worth investors, on the other hand, are uninterested in 4 percent to 5 percent returns and are therefore prepared to branch out,” says Rothbart.
The “tremendous effort” applied in such deals, including dealing with valuers, quantity and bankers, is reflected in the advisors’ fee, which can be 1 percent of the debt raised, sources say. Bridging facilities also provide advisors with relatively high fees, while less-common equity-raising can command up to 3 percent, some say.
In a fragmented debt market, borrowers at the smaller end of the scale value advice. “When the market is less fluid, borrowers may be more confident in their own bank offering the best terms. But in a climate like this with so many options, borrowers are increasingly turning to us to find alternatives that optimise their returns,” says Buchler.
The number of advisory firms operating at the smaller end of the deal spectrum has ebbed and flowed in recent years, often rising after banks make redundancies and former bankers seek a new role in the market. “Bankers think they can go across the other side of the table with the aim of servicing ex-clients, but only a few survive,” Buchler says.
While the number of one-person bands fluctuates, the number of mid-market firms building sustainable businesses, investing in staff and technology, is relatively few. The real measure of their worth in the market, however, is their ability to match those without multiple lender relationships with the capital they need.
Advisor’s opinions differ as to what defines the small- and mid-markets.
Up to €10m
Considered by most to be the small-scale loan market. The larger advisory firms are unlikely to be seen in this size range, with niche advisors more likely to be active, representing small-and mid-market sponsors.
€10m – €50m
Broadly defined by debt advisors as the mid-market. The type of advisory firms active in this space varies; while niche and mid-sized advisory firms will source business from a range of clients active in this space, it is also likely the larger advisory houses will arrange deals for clients, especially towards the higher end of the range.
Up to $25m
Considered by some US brokers to be the mid-market in the US commercial real estate finance sector. While brokers in the US market tend to be limited to certain parts of the market, many consider the European industry too immature to clearly define advisors’ places in the market.