August Newsletter - End of Summer: U.S. Recession & Election Fears
We have had a busy summer here at Faes & Co, with the announcement of our first institutional funding partnership with leading UK investment manager, Triple Point. The partnership is an important milestone as we establish our firm in the U.S., and build a foundation with significant firepower for growth.
Our firm’s founder, Christian Faes, has a long-standing relationship with Triple Point going back some 15 years; and they have provided funding to his previous lending businesses, LendInvest in the UK, and Onate in Ireland. James Cranmer, Managing Partner of Triple Point commented:
“With 20 years of experience operating in private credit, we understand the importance of entering this market at the right time and with the right partner. Partnering with someone of Christian’s reputation, combined with an impressive and growing platform, ensures we are well-positioned for success. We believe the plan for Faes & Co aligns with our ambitions and values, and we look forward to a successful partnership.”
In addition to this, our Fund continues to see solid inflows, and the lending portfolio’s performance is exceptional. Our firm is delivering on its mission to provide consistent, stable, asset-backed returns for investors.
?? Fund Performance
Our Income Fund is continuing to pay a 10% fixed return to investors (that invest over $250k), and importantly continues to be a diversified portfolio of performing first mortgage loans against residential property in the U.S.?
As interest rates start to come down, we expect to reduce the return on our Fund, towards our Fund base rate of 8.5%. If you are interested in investing in our?Fund, or topping up your investment, please let us know so that you can lock in the 10% rate.
Our Fund brochure can be found here, and we have a new updated Fund factsheet which can be found here. If you’d like to book a call to run through the Fund, or to hear our views on the market, please contact Jamie on email at [email protected] or you can schedule a meeting directly here.
???? London Visit
Christian will be in London on the week commencing 23 September for meetings with investors. There will also be a number of small round-table-style events to run through our Fund. If you would be interested in meeting, or attending one of our events, please let us know at [email protected].
?? Food for Thought
?? Is there a US recession on the horizon?
We often get asked by investors ‘how will your Fund do if there’s a recession in the U.S.’??
It seems that the widespread consensus is that a recession remains a relatively low risk, and that the U.S. economy will more likely go through a ‘soft landing’. Goldman Sachs is putting the chance of a recession at 20%, while JP Morgan is putting it at 35%. It should be noted that both investment banks have revised these numbers upwards, from previous predictions; however, the market consensus has been calling for a recession for some time, but it has yet to materialize. Whilst still a low chance, it is a reasonably real risk, particularly considering recent employment numbers.
Goldman Sachs Chart vs Consensus:
For our Fund, we believe that a recession is not an entirely bad thing, and that our core product is set up well to capitalize such a market environment. Christian set up LendInvest in the UK during the financial crisis, and there are a number of learnings from operating a real estate bridging finance business from that experience.
During a recession or market-pullback, real estate bridging finance can be an opportunistic asset class. What generally happens is that bridging lenders who are funded by mainstream institutions, pull back their risk appetite and lend a lot less money. This means that there is generally speaking, less funding available for borrowers in a recessionary market environment. This means that the funnel of prospective borrowers increases, and the opportunity to be even more selective as to which borrowers to lend to gets greater. That is, there is less competition on the lending side, which means that perversely there is the opportunity for lower risk lending during this period. At the same time, there are arguably more opportunities that make commercial sense for bridging borrowers, and better entry prices for those borrowers. Bridging finance being a key tool for a buyer in this situation.
Another important consideration is the property market, and the value of our security. However, it should be noted that at a 57% LTV, we have significant equity headroom across our loan portfolio before any principal capital would be at risk. Also, it is important to highlight that the average duration of our loans are around 12 months. That means that the property market would need to fall by some 30-40% within a 12 month period for us to lose capital. To put this into perspective, during the financial crisis the U.S. property market fell by 27.4%, and that was over a 6 year period. Therefore, theoretically we would need a disruption to the market on a magnitude significantly larger than the financial crisis, to be at risk across our portfolio.
The other final point to make is that in the U.S., like many parts of the world, there has been a multi-decade undersupply of new housing being built, while the population has continued to grow. This provides a significant safety net to prices, and should assist with providing resilience to house prices remaining relatively stable throughout any market rout. In addition to this, it is estimated that over 65% of the housing stock in the U.S. is over 30 years old, which means that the need for short-term ‘rehab’ ‘fix & flip’ finance, is something that is going to continue for a very long time. Bridging finance is directly attacking the housing shortage gap, and people will need houses to live in regardless of the economic environment.
???? How could the U.S. election affect the housing market?
Obviously, we are in the middle of one of the most dramatic US elections in a long time. We’ve had a president pushed aside after a woeful and revealing debate performance, and now have Donald Trump and Kamala Harris going head to head in what is sure to now be a very close election.
The presidential race is likely to see housing as a key issue, and so we are watching the election closely. Kamala Harris came out with a number of economic policies last week which are targeted towards the housing market and could prove relevant for our business.?
?In particular, Kamala Harris has said she would:
Donald Trump has not gone into significant detail on housing policy yet (at time of writing), but he has promised to reduce red tape to build more houses - and you would think that given his background (and personal interests) he will generally be supportive of the property market.
Whilst it was said that Harris’ plans would add $1.7 trillion to the deficit (not great), her proposals could generally be viewed as positive for housing. Giving $25,000 to first-time home buyers would likely see house prices increase further, and add to liquidity, if nothing else.?
In some respects, we can be comforted by the fact that the country survived the turmoil of the first Trump presidency, coming out stronger and with a better economy; and the current president is all but not there, and the sun still rises and things go on regardless. It does raise the question, does it really matter who the president is? As the chart below shows, maybe it doesn’t so much.
Median house price sales in the US (1993-2024):
?? Our Firm in the Press
We had a number of media publications cover the news around our new institutional funding partnership with Triple Point, including with PERE Credit, Inside Mortgage Finance and Alternative Credit Investor.?
?? Things We’re Reading and Listening to
We really enjoyed this podcast from Ben Horowitz and Marc Andresson from a16z. They go into great detail about why they are supporting Donald Trump (which was something that was seen as relatively controversial in liberal Silicon Valley terms). It is a very compelling listen.
On the topic of the US election, this was also an interesting piece from Bigger Pockets: You can read the article here.
??? Events
We will be in London on the week commencing 23 September. If you would like to meet up and learn more about our Fund, please let us know. We will have a number of small events that week. Please get in contact!
If you will be at one of these events or would like to introduce us to someone that you'd like us to speak with, feel free to reach out ahead of time and let us know.?