Thread by @TihoBrkan

1/ Private credit continues to grow as the public fixed income market reaches almost $14 trillion of negative-yielding debt.

Several reasons why I liked (key word, notice past tense) a sub sector of private credit — real estate debt — for awhile now.

2/ Firstly, I believe real estate is such a wonderful asset class. It has so many advantages and belongs in everyone’s portfolio.

While there is $11 trillion of wealth in IRAs in just the US alone, only 4% is invested outside of Wall Street. I believe many are missing out.

3/ Private real estate debt, either held directly or co-invested with syndicators or sponsors, is also completely uncorrelated to the stock market — unlike REITs.

This gives everyday investors an opportunity to diversify their portfolios & increase risk adjusted returns.

4/ For existing property investors, who usually participate in real estate investments only via the equity exposure, real estate debt gives them a fantastic option to continue to play in the late cycle... even though we might be in the last innings.

5/ Structured correctly, real estate debt offers decently high upside. Of course, you will not get the incredible equity upside that can happen during mid-cycle opportunities, but you will get decently high upside without major downside.

6/ When negotiated right, real estate debt can offer very limited downside — no capital loss even with a -20% or -30% decline in the underlying asset — due to having a senior or mezzanine position in the capital stack.

Your capital is protected with a “real” asset-backing.

7/ At the same time, there is an ability to be rewarded, in a fixed income way, with upside similar to the average of the stock market — but without the crazy VOL.

Some senior debt yields as high as 10% and some mezzanine debt can yield as high as 25% or even more (per annum).

8/ For bond investors, real estate debt is also becoming an attractive investment proposition. As global fixed income (including EU high yield) turns negative, most investors are looking for alternative assets.

9/ Of course, this is scary because you have too much money chasing too few deals & not actually doing due diligence on what is a good deal, average deal or an awful deal.

Everything is being bought in a hurry with a flood of hot money. Investors are starving for yield.

10/ Up to this point I have been very attractive in real estate debt and private credit — an asset class that hasn’t made a lot of front page news until recently.

While every Tom, Dick & Harry is obsessed with FANGs and SaaS stocks, this asset class has, in some cases...

11/ ...delivered similar returns (20% plus per annum) but with much less risk and volatility.

But I’m noticing a huge flood of money into this asset class due to mess central bankers have created in the public fixed income.

12/ Basically, without mincing my words, as this investment and business cycle ages there is plenty of evidence out there that things are becoming overheated and investors losing their common sense and wits.

You can’t blame them. They have a mandate to achieve a certain hurdle.