What’s Worse? Capital Call? Rescue Preferred Equity? Or Foreclosure
We are seeing more and more syndications and funds getting into trouble.
And while years will have to pass before we can really understand the nuances of what leads to losses in each deal, and how to parse out what is due to gross negligence, what is due to incompetence, what is due to fraud, and what is due to bad luck, there are decisions that GP and LP investors have to make right now, to get the “least bad” outcome in a given investment.
Some GPs are trying to raise capital via capital calls. Others are handing the keys back to senior lenders. And others still are raising preferred equity to inject liquidity into the deal.
My question for the experienced capital raisers on this forum is this:
-What’s least bad?
I feel like if a deal is millions of dollars underwater at present valuations, it’s better for everyone to just hand the keys back. Why wait for a day that might not come for a decade? I could be investing the dollars going into a capital call into something else.
Similarly, a preferred equity raise can be the worst case scenario for investors, but it is being billed by some syndicators as a great tool and “safe”.
When I see a fund injecting a preferred or "protected" equity raise into a deal to meet DSCR requirements from the senior lender and pretending like this is somehow any different from a foreclosure and total equity wipeout, I'm confused. This is a disaster, and may be worse than foreclosure for both new and existing investors. It's an alternative, and not necessarily a good one, to capital call or foreclosure.
I think that as a community we need to hold all syndicators accountable to outcomes for investors, yes, but also we need to be practical about what the right thing to do is.
A few syndications have handed the keys back, for nearly total wipeouts. They are getting beat up in the forums here.
However, I wonder if their investors, though angry now, will in time greatly prefer this approach to the extend and pretend approach of those raising rescue preferred equity, or those calling more capital on deals that have little to no equity in them, even after the call.
Should we be giving a little more grace to the folks who have handed it in and admitted defeat, simply because they will not compound losses on those deals?
And, should we be a little more tough on the folks who are in the same position but raising EVEN MORE capital to double down on failing investments?
