Equity Investment: The Latest..

Equity investment into SME property developments is an interesting, fledging market that has caught the attention of developers and funders alike.  

The Background

In order to raise competitive financing, developers have always needed to put some cash/equity into deals, which can be anything from 10% of project costs with senior stretched debt lenders, to 30% of costs with High Street Banks (hence why many developers won’t use them these days).  

The cash in or equity has historically been provided by the developer himself, or by a business partner/family friend, who is often an equity investor. 

Equity investment of course is not a new phenomenon. 

In the commercial world, Private Equity groups are many and varied but tend to operate at a much larger level, putting up funds in the £10’s or £100’s of millions. Most developers looking to borrow between £1m and £20m of debt don’t qualify for these groups, because the equity ticket is too small for the funder. In the SME property development market, up until recently there haven’t been many commercial offerings available but this has begun to change.

What's Changing?

As first charge lending in the UK has continued to get cheaper, those investors looking for bigger returns have had to turn their attention to equity.

For developers equity investment, whilst being expensive, has grabbed their attention too.  With sales slowing, or developers wishing to take on more sites, cash is often tied up in existing sites that limits their ability to grow. 

There are also developers with experience who do not have cash to put into deals for other reasons, or who may be a contractor looking at their first project, and equity investors are attractive for them too.

Clearly the more cash you put into the deal, the better your debt financing terms tend to be, but more developers are trying to profit over multiple sites simultaneously, and therefore wish to lever up utilising as little cash as possible per site for the best ROI, although not all developers share this view it should be added.

How Much Will You Pay?

Equity returns are often from 25-30% p.a. or defined as a profit share % from 50% upwards.  Sometimes it’s a combination of the two as a hybrid product.  The issue at the moment is that, with relatively few players assessing lots of deals, they can a) be picky and b) charge what they like.  Some routes can charge as much as 70% of the profit share in total across a combination of profit share and an annual coupon. 

A big question to ask is:

Do you go with a private investor or a more corporate equity entity?

If you know the individual well, it will probably be easier for them to get comfortable investing in you than if you are strangers.  However, personal investors tend not to have well defined processes.  Corporate equity firms tend to have a process similar to lender, and if it’s attractive, they will invest without much hesitation.  

Either way, the number of mainstream equity investment options are still low compared to debt, with between 5 and 10 avenues depending on your project size/geography, etc.

There are a number of ways to structure this. 

If obtaining the cash/equity slice is a priority for you in 2019, do come and talk with us about what is available for you.