Private debt fund Whitehall Capital launched in 2017 and has achieved enviable results ever since. The firm’s performance comes largely down to its involvement in UK real estate bridge financing deals. Why make this play? And how long can the good times last? Patrick Brusnahan speaks to the firm
Patrick Brusnahan (PB): Tell us about your business model.
Steven Kelly, vice president, Whitehall Capital (SK): We’re a private debt fund that invests in very short-term bridging loans. So if a property investor wants to acquire or refurbish a property (or portfolio of properties), they’re often faced with very tight timescales. They need capital very quickly, and they’re happy to pay high interest rates (in the region of 12% annualised) in order to secure their investment.
Because we’re funded by our investor’s equity, we can send the funds as soon as our due diligence is satisfied. Other alternative lender’s usually have to borrow in order to lend, which means they face multi-layered decision making. In our view, this is often very repetitious and provides little material risk mitigation.
The term of the loans ranges between 3 and 24 months, but our weighted average is usually around 12. So we’re constantly turning over our book, but the short duration keeps the risk low. We typically take a senior charge over the property being financed, so our exposure is well-secured by real assets.
PB: Why is Whitehall Capital relevant to investors at the moment?
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SK: Investors are often looking for alternatives to fixed income. So they want stable returns and low risk, but bond performance has been lackluster. At 10% net return, we can offer low risk but with a sizable excess return compared to other investments.
And right now we’re seeing bonds, as well as equities, both selling off dramatically. The more this happens, the greater the need to diversify into uncorrelated investments. Our fund has extremely low sensitivities to macro-economic variables, which is demonstrated by our return profile – we have retuned 10% p.a. on average since inception in 2017. This shows how we’ve been able to trade through the volatility of 2018, the Covid crisis and, most recently the inflationary crisis of 2022. We’re often asked if we experience these pressures but with a lag (like other private debt investments) but our returns profile shows that we felt no such effect following each of the volatility events I just mentioned.
Our market-beating Sharpe ratio really proves the point I’m making here – our 5-year Sharpe is 6.8. We don’t know of any investment that can match this level.
PB: A 6.8 Sharpe ratio sounds extremely high – how is this achieved?
SK: Because the bridging rates we charge are stable (around 1% pcm) we’re able to achieve target returns consistently, quarter after quarter. So we experience extremely low volatility of returns – and that’s what’s driving the ratio.
PB: How do you foresee the impact of rising rates?
SK: Obviously we’re entering a new environment compared to the years following the 2008 financial crisis, but I don’t expect this to impact us dramatically. Firstly, we are equity funded and so rising wholesale interest rates don’t impact our cost of capital. Secondly, the at c.12% per year, bridging rates are just too far away from base rates to exhibit much of a sensitivity. And lastly, at 12 months maturity, the duration on our book is actually very low. If anything, rising rates actually presents potential for bridging rates to rise as our competitors, who are mainly debt-funded, feel their margins squeezed.
In terms of broader market conditions, when public credit markets experience pressure, bank lending appetite reduces, and this in turn has the potential to increase our pricing power.
PB: What are the risks? And how do you manage them?
SK: The primary exposure is credit risk. But we make sure we only work with established players with a strong track record. We often have repeat borrowers, which is ideal from an in-life management perspective because we know them well – their experience, their assets and liabilities and so on.
The other main risk is property prices. As we are secured by the investment property, we are exposed to changing valuations. However, if property prices fall but the borrower continues to pay, obviously that doesn’t hit our returns. But we target LTVs of sub 70% to give us headroom in the event of a foreclosure and this is reflected in our covenants. We also emphasise regional diversity on our book – we don’t want to be too concentrated in central London, for example, when prices are rising more strongly in the regions.
We’re particularly mindful of supply chain issues at the moment – increased costs of materials and labor, as well as delayed construction. So right now we have extremely limited appetite for projects which require significant redevelopment. A vanilla bridge financing deal doesn’t usually involve construction or development costs, so we maintain a strong bias towards these kinds of deals in our book.
We also build in comprehensive security packages. We target personal and corporate guarantees, debentures and the vast majority of our book is ranked senior. We’re highly selective. We proceed with around 1-in-10 of the deals that we source. And of those, a number of them we’ll walk away from because the security package on offer falls short of our standards.
PB: And how do you ensure you are able to exit at maturity?
SK: In parallel to analysing the above risks, we’re of course always think about our exit, so we’re screening for projects where we know that the risk metrics are going to be attractive to a long-term lender and we expect the property investor will be able to sell in a reasonable amount of time if necessary.
We therefore stay away from illiquid properties such as very large manor estates, central London mansion apartments and so on. Residential assets are the most liquid, but if there’s a commercial premises with a great quality tenant (say Tesco, for example) and they’re on a long lease, we would of course look at this provided the rest of the deal is well-protected. Commercial valuations are generally falling, and many landlords still have rent arrears from the lockdown period, so we would seek additional protections and lend against lower LTVs to mitigate this.
PB: On geography, where does Whitehall Capital focus?
SK: The UK (England and Wales, particularly) is amongst the best jurisdiction in the world from the point of view of the lender, as you can enforce security in as little as 4 weeks provided the property is not the borrower’s main residence. As we only lend to property investors, we always have these rights.
That’s not to say we would never look at deals in Scotland or mainland Europe, but we diligence each jurisdiction on its own merits and mitigate each risk in the security package, while also targeting lower LTVs.
PB: Was 2017 when you noticed this opportunity? What made you enter the market?
SK: Our fund manager Anthony Bodenstein has run an asset management business for years. Around 2012, he started to gain more exposure to the bridging market due to the extremely attractive risk-adjusted returns. Over time, it became clear that the jewel in the crown of the business really was the bridge lending deals, so we set-up a specific fund in 2017. So, while the fund is only 5 years old, the business has been running in some form for 10 years. And in terms of cumulative experience of our team, you’re talking several decades.
PB: What are your targets for the next five years?
SK: We think we can double the book safely in the next year. We’ve made several strategic new hires, and we’re already well on the way to achieving our goal. Of course, the first rule is don’t lose any money, so we would definitely sacrifice this goal in order to protect our investors, but we feel strongly that it is do-able.
We are of course concerned about the macro environment, and we are emphasising diversification in the make-up of our loan book, but we still think there is reason to be optimistic. There are definitely high-quality opportunities out there and the bridging market is growing, it’s just a matter of maintaining disciplined risk management and being particularly mindful of the downside.
Because of the extremely high risk-adjusted returns, we expect to see more capital flowing to the sector. In particular, industry surveys are finding there is strong appetite for exposure to UK bridging from US and European credit funds, which is a sign of the maturation of the sector.