Insights

When we provide development finance for clients, there is quite often a request for equity funding as well as the senior debt, and this brings into frame the potential disparity between the expectations of investors and that of property developers.

As ever, there are two sides to the equation when bringing investor funds into a development project (ie. more than just senior debt), and it is often a matter of finding realistic common ground. An investor who chooses to take an equity stake in a development project is taking on the financial risk that the developer isn’t able, or willing, to take on at that point in time. It’s reasonable for an investor to want their interests to be protected to an extent – and it’s the preferred return we often need to balance with the developer’s expectations on the risk/return profile.

An article we liked is on the following link, and it looks into a recent survey of the investment/return expectations of the broader market, with interesting findings on risk appetite and ROI expectations: https://goo.gl/Pj3L9v

Over the past 6 months something we’ve had requests for, on a number of occasions, is cross-collaterised development finance facilities, where developers will undertake a number of separate developments – but they want a pre-agreed funding arrangement to cover all the proposed sites. The facility size in each case has been in the region of £3m – £5m.
 

Positively, we’ve structured good solutions to each of these. In the case of multi-site residential projects we’ve seen good support with well-priced debt funding and even profit-participation agreements, and; on commercial developments with good tenant pre-commitments the joint-venture equity funding lines have been quite attractive.
 

All in all it suggests the positive market metrics, such as the recent RICS growth predictions, are carrying through to the marketplace – and to the developers we provide structured finance for.

With a tinge of yellow showing in the leaves, it reminds us how quickly this year is going by. The team at Axial Capital hopes it’s been a good Summer for all of our clients and associates!
 

Onto business, and whilst increased volumes of funding flowed into businesses and real estate in the recent weeks, it’s worth noting where that money actually went. Plenty of growing businesses benefited of course, but within the investment industry substantial sums also changed hands between VC/PE houses as stakes in investee companies were traded and portfolios were rebalanced. This is effectively an investment neutral position for the marketplace, but the positive take from this is the sharpened focus of investment houses, and the willingness to continue to support growing businesses. 
 

 We have been involved in this continued flow of capital across the corporate and real estate space this past month, overseeing placement of credit lines to property lending and vehicle leasing companies, and completing private equity transactions into residential and hotel operations. If you are considering your finance needs, the headlines of what you should think about when raising capital can be seen on our Getting Funded page. We like to share a highline overview of transactions and industry news each month, and here’s what we’ve seen over the recent weeks:

 

•  Growth by acquisition is a good approach to expansion when a company can manage the commercial and cultural integration that comes with it. Presently we are advising 2 firms on post-Covid rollups, negotiating terms on the purchase and contracts, and providing effective capital to ensure successful completion. For clients looking at this approach to growth, our team can answer your questions on financing and transacting on buyouts, including protecting your downside on earn-out performance risk.   
•  With the bricks & mortar market creaking back into action, co-investment equity and operational growth finance is once again readily available for well structured property projects, generally at £500k+. Two current clients include a hotel that we’re assisting through an expansion and refinance, and; a residential development for 20 dwellings in the Midlands which requires both bank lending and additional equity on a value of £8.4m. Additionally, a £25m credit line for a property lender is being finalised as the market reinvigorates at all levels. 

 Funding rounds continue with success across the market, with notable completions in July including:

• A London-based sex therapy app has raised £1m in their seed round!
• Tandem has secured £4.7m for expaning its digital language training
• Lockdown increased our awareness of mental health in the UK, and MyHelp has secured additional funding to support its digital solution

As part of ongoing dialogue with clients on how to raise capital, whether as VC investment or institutional credit, we often come back to the points of preparedness and market traction. To petition an investor for funds, the starting point is a succinct deck or business appraisal that illustrates how you’ve proven concept and how you’ve secured revenue streams – and off the back of that discussions can be much more positively focused on how the investment will be structured and transacted. We continue to work with clients to create their investment proposition, and to work alongside them where necessary in achieving revenue targets and successful capital raises.  You can contact us directly if you’d like us to do the same for you.

With our current transactions including funding buyouts for multi-million pound digital firms, through to business investment for SME’s that are expanding their current operations, all of our negotiations and investment arrangements have had one thing in common – everyone involved has completed their part of the transaction from home.

The director of Axial Capital discussed this in an article back in May when there was an ever-present pause in seeing deals completing, and investment managers struggled to come to terms with placing funds into a business where they’d never met the owner in person and couldn’t send in an auditor for an onsite evaluation of the core business functions. Only a couple of months on and we’ve seen a marked change with funds now being committed and deployed across almost any sector that can show preparedness – particularly for the remote (and dare I say it, socially-distanced) nature of business through coming 12 – 24 months and beyond.

So if your business levels have stabilised and you’ve identified an opportunity for expansion in the market, how should you approach raising capital? If your funding preference is geared more toward investment or venture finance then treat virtual working like an extension of your office or boardroom – you might not shake our hand in person but in all other respects we want to feel that all parties are fully engaged as though we were dissecting a pitch deck and financials with you across the table. So yes that means video calls (at least at the point of serious evaluation of the funding proposal), and presenting yourself on-screen in the same way as you would if you’d travelled in to meet us at our Embankment offices.

Of course, we’re not sitting across the table reviewing the business case with you, so turning your proposal into the most engaging and illustrative overview of your business can make all the difference. In itself this suggests that businesses that have adapted to offer remote and virtual connectivity for clients will get the most attention (even one of our clients in the used car space has embraced this, enabling virtual tours and negotiations and a delivery service that allows the customer to purchase and receive a car without having left their home. It’s been more successful than you might think!). Whether we’re providing investment or a corporate debt facility, the ability to demonstrate that your business and your market is adapting its sales and service channels successfully will make all the difference.

We believe that this forced adaptation has some truly positive side-effects too, with those previously less able to access traditional commerce (think the booming elderly population with disposable income, and anyone not within commuting distance of a main city or trading hub) now being reconsidered along with everyone else. We’re quick to give honest feedback on submissions, so send us your proposition for funding and expansion and we’ll make time for a discussion.

Through 2017 we have worked with clients and joint-venture partners on an array of development projects, and whilst most of these have involved us raising development finance & equity for clients, we have also had a number of inquiries for capitalizing fast-growing property development firms at the corporate, or Topco, level. This objective raises a number of questions, both for the development firm and for the investor side.

There is certainly a preference for the majority of funders to appraise and support developments on a case-by-case basis, as when money is ring-fenced and deployed it begins accruing returns (IRR) obligations from the outset. In the mid-size development space, it’s generally more efficient for money to be attached to a single, identified asset, for measurable anticipated results. Accordingly, a good deal of the money that supports those mid-space developments adheres to this funding philosophy.

When funds are being requested at the Topco level, for discretionary use across a broader portfolio of developments/projects, a funder must accept a less precise – and essentially more aggregated – investment dynamic, with generally a longer timeline and a more variable risk profile. Many funders in this mid-size development space opt for a case by case funding model as it allows them to manage their portfolio risk more directly.
Equally, from the perspective of the property firm, the question must be addressed with respect to why they really need or want Topco investment. Doing this will often result in giving away a solid stake in their business, and more poignantly – if the business doesn’t have the equity or asset base to support portfolio-level development, is it really the right time to ask someone else to take the equity risk? The answer may well be yes, and for experienced, niche operators we have seen solid interest from larger funding offices to support that growth – though not without addressing the above line of questioning.

To discuss financial structures to suit your development pipeline, call us on 07718 966556 or email enquire@axialcapital.co.uk

This year we have been evolving our funding models to provide development finance for UK property projects, not only via secured debt facilities and private equity placements, but more recently with the use of property bonds. The question becomes one of choice and suitability, as costs and timing are key considerations when deciding which type of funding to employ.

We recently arranged a property bond for a hotel joint venture, where the property already existed and had a tangible value, but had upside potential via a schedule of improvement works and operational streamlining – if the client had the funds to acquire the site. Whilst being set up as a joint venture, it wasn’t feasible to deploy private equity investment due to the extended timeframes required for improving and enhancing the operational position of the hotel. Accordingly we structured a first charge property bond to allow a 3yr horizon for an exit or refinance of the property – giving investors a secure asset backed medium term investment, and at the same time giving the hotel company access to capital to acquire and improve a core operational asset.

To discuss funding models suitable to projects across the UK, we invite you to look over our website at www.axialcapital.co.uk or to contact us directly on:

+44 (0)7718 966556 / enquire@axialcapital.co.uk