Fundrise, a Washington, DC-based alternative asset manager, this month rolled out its first dedicated real estate debt strategy, Opportunistic Credit Fund.
The firm hopes to raise $500 million by 2024 for the fund, which was launched at a time of a brewing liquidity crisis, said co-founder and chief executive Ben Miller.
“The demand from real estate companies for funding the gap in capital stacks became so acute that we decided to build a fund specifically designed to address the need,” Miller told affiliate title Real Estate Capital USA.
“As we near the end of the economic cycle, funds active at the bottom are likely to outperform,” he added. “There is a liquidity crisis brewing, which I believe comes to a head in September or October. Those with capital to step into the gap would receive excess returns.”
The fund is designed to give individual investors a rare opportunity to access credit investments emerging from current economic dislocation and reduced liquidity across financial institutions worldwide. In its first quarter, the strategy delivered 13 percent annualised yield.
While this is the company’s first dedicated credit fund, Fundrise has previously made almost 100 credit investments in previous real estate funds.
The past 12 months have witnessed the Federal Reserve’s swiftest-ever period of interest rate hikes to curb soaring inflation, profoundly impacting both debt and equity markets. This unprecedented environment – dubbed The Great Deleveraging by Miller back in November 2022 – has created extensive opportunities for credit investors as even high-quality borrowers face financing challenges.
“The expansionary monetary policy of recent years led to lower borrowing costs and inflated asset prices, encouraging an increase in debt. Now, skyrocketing interest rates, regional bank instability and tightening lender requirements have led to borrowers facing distress, creating enticing prospects for well-prepared credit investors,” said Miller.
Since inception, Fundrise has acquired or invested in nearly 40,000 residential units across the Sunbelt and built a decade-long track record with many of the top banks and capital market brokers. The firm’s experience acquiring, financing, and managing these kinds of assets positions it strongly for this market shift, Miller believes.
“Most banks are distressed, in desperate search for liquidity, which means not only that there is a liquidity shortage in markets, but also banks will be a source of distressed deal flow. The second half of 2023 is likely to be the bottom as the capital crunch finally comes to a head but before the Fed is ready to lower interest rates,” Miller added.
A seat at the table
Miller believes many real estate borrowers are struggling to provide additional equity to pay down loans, giving well-capitalised investors the chance to invest in high-quality assets with extraordinary risk-adjusted return potential.
“This rare confluence of events offers a once-in-a-decade opportunity in private credit,” he said.
“We’re aiming to bring the most powerful investing strategies in the world – the ones typically reserved for only institutional investors – to individual investors,” said Miller. “Our new private credit strategy gives our investors a seat at the table for what I believe will be one of the strongest credit investing environments of the last few decades.”