a connection made to last?

Private debt fund Whitehall Capital was launched in 2017 and has achieved enviable results since. The company’s performance is largely due to its involvement in property bridge financing transactions in the UK. Why make this game? And how long can the good times last? Patrick Brusnahan talk to the company

Patrick Brusnahan (PB): Tell us about your business model.

Steven Kelly, Vice Chairman, Whitehall Capital (SK): We are a private debt fund that invests in very short-term bridging loans. Thus, if a real estate investor wishes to acquire or renovate a property (or a portfolio of properties), he is often faced with very tight deadlines. They need capital very quickly and agree to pay high interest rates (around 12% annualized) to secure their investment.

Because we are equity-backed by our investors, we can send the funds as soon as our due diligence is met. Other alternative lenders typically have to borrow to lend, which means they are faced with multi-level decision making. In our opinion, this is often very repetitive and offers little significant risk mitigation.

Loan tenors vary between 3 and 24 months, but our weighted average is usually around 12. We therefore constantly renew our portfolio, but the short duration keeps the risk low. We generally take primary liability on the property being financed, so our exposure is well secured by real assets.

PB: Why is Whitehall Capital relevant for investors at this time?

SK: Investors often look for alternatives to fixed income securities. So they want stable returns and low risk, but bond performance has been poor. With a net return of 10%, we can offer low risk but with a significant excess return compared to other investments.

And right now, we’re seeing bonds, as well as stocks, selling dramatically. The more this happens, the greater the need to diversify into uncorrelated investments. Our fund has extremely low sensitivities to macro variables, which is demonstrated by our return profile – we have readjusted 10% per year on average since inception in 2017. This shows how well we have been able to trade through the volatility of 2018, the Covid Crisis and more recently the 2022 inflationary crisis. We are often asked if we are under these pressures but with a lag (like other private debt investments) but our return profile shows that we have no not felt such an effect after each of the volatility events I just mentioned.

Our market-beating Sharpe ratio really proves what I mean here – our 5-year-old Sharpe is 6.8. We don’t know of any investments that can reach this level.

Steven Kelly, Vice Chairman of Whitehall Capital

PB: A Sharpe ratio of 6.8 seems extremely high. How does he achieve this?

SK: As the bridging rates we charge are stable (around 1% pcm), we are able to achieve target returns consistently, quarter after quarter. The volatility of returns is therefore extremely low – and this is what determines the ratio.

PB: How do you anticipate the impact of the rate hike?

SK: Obviously we are entering a new environment compared to the years following the 2008 financial crisis, but I don’t expect that to affect us dramatically. First, we are equity-funded, so rising wholesale interest rates have no impact on our cost of capital. Second, at around 12% per year, the transition rates are simply too far from the base rates to show much sensitivity. And finally, at 12 months of maturity, the duration of our book is actually very low. On the contrary, rising rates actually present the potential for bridging rates to rise as our competitors, who are primarily debt-funded, feel their margins tighten.

In terms of broader market conditions, when public credit markets come under pressure, banks’ appetite for lending decreases, which has the potential to increase our pricing power.

PB: What are the risks? And how do you manage them?

SK: The main exposure is credit risk. But we make sure to only work with established players with solid experience. We often have regular borrowers, which is ideal from a management point of view in life because we know them well – their experience, assets and liabilities, etc.

The other main risk is the price of real estate. As we are guaranteed by the investment property, we are exposed to variations in valuation. However, if property prices fall but the borrower continues to pay, this obviously does not affect our returns. But we target LTVs below 70% to give us breathing room in the event of foreclosure and this is reflected in our covenants. We also emphasize regional diversity in our book – we don’t want to be too focused on central London, for example, when prices rise more steeply in the regions.

We are particularly mindful of supply chain issues at this time – rising material and labor costs, as well as construction delays. So right now we have an extremely limited appetite for projects that require significant redevelopment. A vanilla bridging finance deal typically does not involve construction or development costs, so we maintain a strong preference for these types of deals in our book.

We also integrate comprehensive security packages. We target personal and corporate guarantees, debentures and the vast majority of our portfolio is senior rated. We are very selective. We process about 1 in 10 transactions that we research. And of these, a number of them will be dropped because the security package offered is not up to our standards.

PB: And how do you ensure that you can release when mature?

SK: Along with the risk analysis above, we are of course still thinking about our exit, so we select projects where we know the risk parameters will be attractive to a long-term lender and we expect that that the real estate investor will be able to sell within a reasonable time if necessary.

We therefore stay away from illiquid properties such as very large mansions, central London mansions, etc. Residential assets are the most liquid, but if there is a commercial premises with a high quality tenant (say Tesco, for example) and it has a long lease, we will of course consider this provided that the rest of the transaction is well…protected. Commercial valuations are generally down and many landlords are still in rent arrears from the lockdown period, so we would seek additional protections and lend against lower LTVs to mitigate this.

PB: Geographically, where is Whitehall Capital concentrated?

SK: The UK (England and Wales, in particular) is one of the best jurisdictions in the world from a lender’s perspective, as you can get the security applied in as little as 4 weeks provided the property is not the principal residence of the borrower. As we only lend to real estate investors, we still have these rights.

That’s not to say we would never review deals in Scotland or mainland Europe, but we do review each jurisdiction on its own merits and mitigate every risk in the security package, while also targeting weaker LTVs.

PB: It was in 2017 that you noticed this opportunity? What prompted you to enter the market?

SK: Our fund manager Anthony Bodenstein has been running an asset management business for years. Around 2012, he began to gain more exposure to the relay market due to the extremely attractive risk-adjusted returns. Over time, it became clear that the crown jewel of the business was really bridge loan agreements, so we created a specific fund in 2017. So while the fund is only 5 years old , the company has operated in one form for 10 years. And in terms of our team’s cumulative experience, you’re talking decades.

PB: What are your objectives for the next five years?

SK: We think we can safely double the pound next year. We have made several strategic new hires and we are already well on our way to achieving our objective. Of course, the first rule is not to lose money, so we would certainly sacrifice that objective in order to protect our investors, but we believe it is doable.

We are of course concerned about the macro environment and we are emphasizing diversification in the composition of our loan portfolio, but we still believe there are reasons for optimism. There are certainly some high-quality opportunities out there and the bridge market is growing, it’s just a matter of maintaining disciplined risk management and being especially mindful of the downsides.

Due to extremely high risk-adjusted returns, we expect to see more capital flowing into the sector. In particular, sector surveys reveal that there is a strong appetite for exposure to the UK, in conjunction with US and European credit funds, which is a sign of the maturing of the sector.

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