The Need for Private Lending
Many Investors find it important to diversify their investments into alternative strategies to attempt to protect their nest egg from the ravages of inflation, taxes, and market volatility. Investors who live on fixed income traditionally turn to debt-based investments, such as bonds, to accomplish this important goal. These investment vehicles typically have little to no inflation-adjusted returns (actual return minus rate of inflation).
In a general sense, real estate is an attractive alternative strategy because it provides both a hedge against inflation and historically low correlation to stocks. In other words, real estate investment values may rise when stocks fall or gain value above the inflation rate during an inflationary period. Although real estate is a popular investment vehicle, most investors are not able to access the asset class without becoming an expert themselves.
In fact, many people who invest in real estate still leave a large portion of their available capital in savings accounts, money markets, certificate of deposits, and other short-term investments. In some cases, they need instant access to their capital, and the liquidity of these types of investments ensures that. In other cases, they are seeking the comfort that they have the ability to access the capital at fixed points throughout the year, which we would define as near-term liquidity. Investors seeking near-term liquidity need to learn about private lending: an alternative fixed rate investment option that typically provides better interest rate returns than traditional public bond offerings.
Caliber’s mission is to build wealth with a full range of real estate-based investment options tailored to the individual goals and risk tolerances of ourclients. Understanding the need for a better alternative to traditional investment options, Caliber created our first private-lending investment, the Caliber Fixed Income Fund, LLC in 2012. The fund’s success led Caliber to opening additional private lending options, with the company currently on our third iteration of the concept, the Caliber Fixed Income Fund III, LP, or “CFIF III”. This fund boasts the opportunity for a fixed rate of return of 9.25% with a 12-month lock-up period or 8.25% with no lock-up period. In both cases we provide income distributions monthly.
How We Do It
One of the most commonly asked questions from investors unfamiliar with the standard returns on private-equity debt funds is “How do you guys do that? That doesn’t seem very conservative.”
This is not an unreasonable question as the best current money market rates don’t break 2.5% and the most commonly used benchmark, S&P 500 Index, YTD performance is at 2.67%.
We can provide higher returns by lending to real estate assets.. The lending we do is typically secured and fits as a priority in the “capital stack”. This allows us to provide consistent monthly distributions to our investors as it is required for our real estate assets to pay required interest rates.
This process works similarly to collateralized debt obligations or “CDOs” which are a mainstream financial product that pools together cash flow generating assets and repackages them into discrete tranches that can be sold to investors.
Rates paid on real estate investments are higher than standard debt instruments because generally the asset that backs the loan is non-liquid. This means if one’s principal is to be repaid, unlike a treasury bond, there usually needs to be either a sale of an asset or a refinancing of the property.
Why We Do It
We offer our Private Lending Fund for two key reasons.
The first is access to capital at a reasonable price for the needed use and at a speed of execution that is far faster than traditional banking. Rather than seeking short-term debt from outside parties, Caliber seeks to provide that opportunity directly to its investors, cutting out the middle-man and an extra layer of fees.
The second is to provide an option that meets the needs of our clients seeking dependable, fixed income. While a particular client may have made a higher total return on investment by investing in the equity of the project, in many cases that return may not be realized until a project is sold, 3-8 years from the date of purchase.
Many investors choose to forgo a portion of their return in exchange for certainty of cash flows and timing.