Capabilities

The financial services landscape has seen significant transformation over the past decade, transcending the traditional role of banks as sole mortgage lenders. Diversification has emerged, with pension funds, endowments, family offices and private debt funds actively participating in the market to secure stable and predictable returns.

Remarkably, non-bank lenders already command 40% of the real estate market in the US, rendering it a more established and considerably larger market compared to both the UK (25%) and Europe (10%). The maturity of the US market signifies that borrowers are already acclimated to a lending environment beyond traditional banks.

Valvest employs a strategy by directly sourcing and originating mortgage loans, strategically allocating them across various fund structures. This approach not only grants us comprehensive control but also enables the bundling of loans based on distinct liquidity profiles, meticulously tailored to meet the diverse liquidity needs of investors. This strategic bundling provides investors access to a well-diversified loan portfolio, reinforcing asset protection.

Notably, each fund structure rigorously adheres to the European Fund Regulation framework, ensuring a robust regulatory foundation. Through this nuanced methodology, Valvest not only safeguards assets but also upholds principles of transparency and regulatory compliance, offering investors a sophisticated and secure opportunity to engage in the dynamic landscape of mortgage investments.

Valvest specialises in first lien senior mortgages, a specific segment of the broader CRED (Commercial Real Estate Debt) market, which typically have maturities of 12–48 months and are made to institutional real estate investors to bridge a period in which a property is in the process of stabilizing. Valvest focuses particularly on professional, commercial borrowers who have pricing power.

US Bridge Loans are characterised by the following features:

• Attractive risk-adjusted return from interest payments on the mortgage loans

• High security through a 1st ranking senior mortgage on a prime commercial property

• Structural credit enhancement through the borrowers' equity cushion

• No duration risk – the loans in the fund are structured as floaters and benefit from rising interest rates

• High diversification potential in the overall portfolio due to the low correlation to other asset classes

Commercial Real Estate lending represents a vast asset class of approximately USD 5.6 trillion, exceeding the size of the US High Yield market by more than threefold. Amidst the current challenges, the commercial real estate debt (CRED) market proves to be a robust choice for investors. With its significant heterogeneity, offering diverse investment opportunities and financing structures, CRED has delivered solid returns even in a recessionary environment. This resilience is attributed to its privileged position in the capital structure, which ensures steady income and safeguards investors' capital.

In the coming months, we anticipate a flood of maturing mortgage loans reaching an estimated $2 trillion. Increased interest rates along with economic uncertainty particularly pressure borrowers who cannot refinance their properties and must put them on the market, leading to a devaluation of property valuations.

What initially appears as a short-term challenge could, upon closer examination, prove to be an opportunity for liquid real estate investors. The stressed market conditions and the availability of attractively priced properties present a unique opportunity for those familiar with the complex challenges of real estate financing.

At Valvest, we work with local experts to identify unique investment opportunities that are not dependent on market movements. Such interesting opportunities typically arise from idiosyncratic or event-driven catalysts, such as loan maturities, lease expirations or repositioning of commercial properties. We believe that short-dated mortgages are an appropriate investment in a disruptive economy where the functionality and desirability of buildings change frequently and require repositioning. At this stage, the building value is already significantly reduced, and together with the equity of the real estate investor, minimises the real estate price risk for the mortgage lender. In our view, this is the ideal time to finance an experienced real estate investor.

The current environment for mortgage lenders is very exciting as an attractive spread over SOFR can be achieved with low risk. This with a defensive bias, no directional bet and regardless of the macro situation.

With Valvest's commitment to transparency, honesty, and reliability, coupled with a steadfast focus on client needs, our cautious investment approach prioritizes the preservation of capital while seeking reasonable returns.

Opportunity Identification: We systematically identify opportunities within the real estate financing market, focusing on prime properties valued between $20 to $50 million in the top 25 metropolitan areas. This involves thorough market analysis, identifying niches where smaller banks and major investment firms are underserving borrowers.

Due Diligence and Risk Assessment: Upon identifying potential investment opportunities, we conduct rigorous due diligence to assess the viability and risk profile of each opportunity. This includes comprehensive analysis of borrower financials, property valuation, market conditions, and associated risks. We prioritize assets with stable revenue streams and reliable borrowers.

Loan Structuring and Risk Mitigation: With a focus on defensive loan composition, we carefully structure loans with a conservative average Loan-to-Value (LTV) ratio. This ensures that our investments are well collateralized, providing a substantial equity cushion to mitigate potential losses. Additionally, we require borrowers to establish an interest reserve, capable of covering multiple months' worth of interest payments, further bolstering the protection of our investments.

Portfolio Management and Monitoring: Once investments are made, we actively manage and monitor our portfolio to ensure ongoing alignment with our investment objectives. This involves continuous monitoring of market conditions, borrower performance, and overall portfolio risk. We employ robust risk management strategies to adapt to changing dynamics and mitigate potential risks proactively.

Long-Term Relationship Building: Throughout the investment process, we prioritize building long-term and trusting relationships with clients and business partners. Transparency, honesty, and reliability are paramount in all interactions. By fostering strong relationships, we aim to cultivate a supportive network that enhances the sustainability and growth of our investments over time.

Continuous Improvement and Adaptation: We continuously evaluate our investment process and strategies, seeking opportunities for improvement and adaptation. This includes staying abreast of market developments, regulatory changes, and emerging trends to refine our approach and optimize investment outcomes for our clients.

By adhering to this systematic investment process, we aim to preserve capital, generate attractive risk-adjusted returns, and deliver long-term value for our investors while maintaining alignment of interests and transparency throughout every stage of the investment journey.