Do This Now, Or Be Ruined By High Interest (6 Months Left) – Natu Myers of Raises.com
What does the huge interest rate hike mean for your private equity capital? Raise your private equity fund and your mergers and acquisitions or real estate’s private equity deals? So at a time when the recording of this video, the Fed in the US just increased the interest rates. And up north, the Bank of Canada announced three different dates that they’re going to announce new hikes in interest rates. So what does this mean as somebody So if you’re somebody who is raising capital for a real estate private equity fund or you’re looking to set up a real estate private equity fund, maybe you’re looking to set up a mergers and acquisitions fund, what on earth does this really mean for you and what does this mean for your deals? So there are three critical things that you have to keep in mind, because if you don’t and if you get it wrong, things can go down to toilets and down the sewers. So the first thing is seen as a lot of people are seeking to raise capital to make acquisitions, because at the end of the day, many people are either real estate investors who are already invested in real estate or they’ve partnered with other investors to acquire more real estate as a syndicator. You know, many of them seek to set up a private equity fund, and in doing that, basically all the private equity fund is is really just acquiring these assets by getting some but getting debts right, by getting some debts and then filling in the equity gap by using somebody using your own equity or partnering with people, investors to put in the equity for the deal. (high interest rate)
And so many people set up funds for many situations. So because the interest rates are going up for the people on the side of needing debts, they have to pay more obviously. And on the people, people on the side of of giving out loans and giving out debts, they’re the ones who are benefiting because and this is just a quick background for those who aren’t familiar, many of you are because essentially when there’s a lot of inflation, the value of the currency devalues. And when the value of the currency devalues, people who need to get like people who lent out money to governments, to countries, to companies, the income that they have goes down in value because the value of the currency goes down. And so as a way to potentially fight this, people increase the interest rates so that the value that you’re getting from giving out your loans will increase. So let’s say I give out a loan for 10% and I get a 10% interest. That 10% goes down in value because there’s inflation, more money, less value and money. So that 10% I get would be less. So a way to fight it. If I increase the interest rates to 12%, then my value would be realized. So in the case of somebody setting up a deal like a lot of people who are working on types of transactions where so if you’re selling debts and if you’re selling interest to investors, you’re going to do really well because some people, they structure their deals and their funds so that they sell the interest to investors. (high interest rate)
And if somebody does that, then they can win in the sense of the amounts of returns that investor would get would go up. So, for example, if you’re acquiring, let’s say you’re acquiring debt notes or you’re acquiring different packages, different pieces of paper, you’re acquiring paper that says that different people have to pay so and so what like you’re you’re acquiring you know, you’re acquiring different debt notes. It can be really beneficial to you because the amount of interest that would be paid to you be higher if you’re acquiring. And also businesses that are in the business of acquiring debts, for example, you’re acquiring debt collection agencies, you know, things of that nature, then you can also benefit because the amount of revenues that can go up and those types of companies can go up in those types of companies. However, if you’re on the other side of the equation, if you’re somebody who needs a lot of debts to be able to actually begin what you’re doing, and then your whole deal is based on the debt that you need, then the debt coverage ratio of all the deals that you’re working with would be more narrow. So in other words, let’s say you’re working on acquiring like like an apartment, you know, the amount of rent money that needs to come in to combat the interest rates that so you get the loan to you get a loan to buy an apartment that so you get a loan to buy an apartment. (high interest rate)
The amount of money that the apartment needs to generate to fight the interest on that loan on that mortgage has to be higher. So it makes the entire portfolio much more slim. So for people on this side of the equation, where you need that then is to focus on more equity and focus more on cash flow and assets. If you’re able to focus more on cash flow and assets and you’re able to use more equity by de-risking the investments, by working with more equity, lowering the loan to value ratio, then you be able to be in a good position to say, Hey, my loan to value ratio. So the amounts of debts I’m getting in proportion to the amount of equity I’m seeking is much lower and really lower that minimum that loan to value ratio. And if you’re able to do that, if you’re able to say, Hey, for all the deals I’m acquiring for my private equity deal and my private equity fund and mergers and acquisitions or in real estate. Loan to value ratio has gone way down, then that would mean that there’ll be less risk of you having to combat a lot of high interest because you have a lot of equity to fight against that interest rates on the loans that you use to purchase all your deals. So number one, make sure I guess let me go back to the beginning, number one. (high interest rate)
Try to be on the side of giving investors interest. So be in the position where you’re you’re getting loans from people and then the interest that you’re getting from people be get paid gets paid out to investors. If you’re able to create a situation where you’re in that position, you can win. Number two, make sure you focus heavily on cash flow and you focus more on equity by lowering the loan to value ratio of all the deals you’re acquiring in your portfolio, immediately have a very low loan to value ratio and I guess has a bonus if I can just think on the fly. And number three is understand that it all comes back to your core competency and what you’re good at. If you put yourself if you put yourself in a position where you need to get a lot of debts and put the portfolio at risk, then look at adding in something special based on your core competency. So for example, let’s say that you’re already too deep in the waters and you already said that, Hey, I’m only going, I’m going to have a really thin loan to value ratio and you didn’t do it. All the things that we recommended. One thing to fight this is to have a really broad broaden out your PPM and broaden out the terms by which you’re offering investors deals, because if you make the terms broader, then you’ll be able to adjust and have wiggle room for you to add different things to lower the risk. (high interest rate)
For example, let’s say that somebody has a situation where they want to acquire some, let’s say some radio companies and they want to put it into a fund, really random idea and let’s say because they got stuck and it’s too late, they can just edit their private placement memorandum and edit their terms so that they can say, Hey, we can also invest in in value add deals or in deals and fix and flip houses or something. And if you do that, then you’re able to add some diversified portfolio by adding some capital appreciation in. In other words, deals that can go up in value. And if you do that, then you can lower the overdependence on deals with a really slim loan to value ratio. So in other words, diversify by working with things that can add capital appreciation and different forms of cash flow if it’s in your core competence. So that person in that quick example, they won’t be somebody who hasn’t studied, fix and flip. They would have to be somebody that’s been in the fixed and flip business for years or a partner of somebody who has been in for years. So find alternative means of increasing the amounts of either the capital or cash flows by diversifying. If you’ve already if you already sold a deal that you’re too deep in. And so that’s it for those three points. And just to recap, make sure that you focus on selling investors notes, sell investors interest. Find a creative way to sell investors interest, whether it be acquiring debt collection companies, getting loaned out yourself, getting loans from yourself, and then you just feel you just matched the gap by selling that debt back to investors, selling the interest back to investors. (high interest rate)
Number two, if you’re if you’re on the wrong side of the equation, where you’re you need loans for your deals to work, make sure that you focus on getting a lot of equity and lower the loan to value ratio as much as you can so that there’s a lot of wiggle room for you to deal with high inflation. And number three, make sure that if you can’t do any of the first to diversify by focusing on another core competency that either you or your partners are good at to increase the amount of cash flow or the capital appreciation in the deal. But if you’re able to do those three things, then you’ll win. So with this, if you’re wondering what I’m talking about or if you know what I’m talking about and you actually want to set up your proper either syndication, real estate, private equity fund, or mergers and acquisitions private equity fund in two weeks or less, and actually get some relationships to investors that can actually help you close on the deal. Just had to raise this dotcom because this is what we make happen. So with this, we’ll see you in the next one. And this is a video that you should come back to whenever the interest rates take a hike. (high interest rate)