Dechert 4 Real

Springing Into Real Estate Debt Funds, EDGAR Next, Corporate Transparency Act Updates and Surprising Sports

• Dechert LLP • Episode 21

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Spring is in the air as Dechert 4 Real’s Jon Gaynor, Ella Smith and Sam Gilbert take a fresh look at the world of real estate debt funds with Dechert financial services partner Gerry Brown, discussing market trends, the benefits of evergreen funds vs. closed-end funds, how tokenization will impact this space and much more. Plus, CMBS associate Parker Lacoste joins the show with updates on the SEC’s EDGAR Next program and the Corporate Transparency Act, while Ella invents an all-new sport: “gobf.” 

Show Notes: 

EDGAR Next: What Filers Need to Know and How They Can Prepare, Dechert OnPoint (March 2025) 

Jon Gaynor:

Hello, and welcome back to the Dechert 4 Real podcast, where we discuss current issues and trends in commercial real estate finance. We aim to bring market commentary about developments, updates you can use and hopefully a little bit of banter along the way. I'm Jon Gaynor, a partner based in Dechert's Philadelphia office.

Ella Smith:

I'm Ella Smith, a partner based in Dechert's Charlotte office.

Sam Gilbert:

And I'm Sam Gilbert, a partner based up in Dechert's Boston office.

Jon Gaynor:

Today, our guest is Dechert partner Gerry Brown, who is here to talk to us about real estate debt funds. Before that, in our 411 segment, we'll talk to Dechert associate Parker Lacoste about EDGAR Next and updates regarding the Corporate Transparency Act. But first, let's get 4 Real to break the ice. Folks often say that your career is like a marathon and not a sprint, although to me right now, it feels more like a marathon where I have to sprint. And that got me wondering whether any of you have done any competitive sports. Sam, why don't you tell us about a competitive sport you've done?

Sam Gilbert:

Sure. Well, I think for our loyal listeners, you've heard me talk a lot about hockey. I mean, I played hockey growing up, and I coached my daughters playing youth hockey. Now, it is it's March 19 when we're recording this. We still have one more weekend of hockey in the season, and then we are done until August when the season starts up again. So that would be probably my favorite competitive sport to both watch and play. We have a coaches game for those of you who are interested in in attending. It'll be streamed live on LiveBarn sometime in April, you can tune in and watch. We'll give you a recap on the next podcast.

Jon Gaynor:

Oh, great. We'll ask about it. What about you, Ella?

Ella Smith:

Well, I don't know that I'm very talented at any competitive sports, but the one thing that I'm enjoying right now is golf. I am just really learning to golf, and it's mostly because of work events where I've been put in a situation where I need to be golfing. So, I've learned the rules, I have taken lessons, I've played 18 holes multiple times now, and hopefully I will continue to improve, because my balls don't go very far. But I really do enjoy it, and it's nice actually being at the point where you are not so good that you actually care when you have a bad shot. I have a bad shot all the time, and I'm just happy to be out on the course and enjoying the weather. It's

Jon Gaynor:

It's funny because I tried to learn golf from my father-in-law, and he was like,"You know what, Jon, golf isn't for everybody." So, glad you're sticking with it.

Ella Smith:

It's easier to take lessons than, like, play with someone that you know well.

Jon Gaynor:

So, my competitive sport is that I used to do competitive Latin and ballroom dance. I was at, like, the pre-championship level back in college and grad school, and it was a lot of fun. I had salsa, rumba, chacha, jive, samba, Bolero, waltz, Viennese, waltz, Tango, Foxtrot, quick step. You think I'm done, I can keep listing dances.

Ella Smith:

No, no, you don't have to, because I have seen this. I have actually been witness to Jon breaking out the salsa moves down at Mango's, at a maybe late night after CREFC Miami, and it was very impressive. Like I was blown away. I didn't think that Jon could know so much about LIBOR and still be able to dance like that. It's truly a dichotomy.

Jon Gaynor:

You got to balance it somehow. And thank you for bringing up our dearly departed LIBOR. I always like that. I think that counts as getting 4 Real with the hosts. So now, let's move on to our 411s this month. For our 411s, I am joined by our associate, Parker Lacoste. He's on our CMBS team. Parker, welcome to the podcast.

Parker Lacoste:

Thanks for having me, Jon, longtime listener, first time caller.

Jon Gaynor:

Happy to have you here. Now, before we get into the substance, let's get 4 Real with you. So, competitive sport, have you done any? What do you want to tell us?

Parker Lacoste:

Yeah, I would say my competitive sport is maybe not deep-sea fishing, but certainly offshore fishing. I think, competing with nature and the elements, everything like that, you never know what's gonna happen once you get out there in the water, what you're gonna catch. So that's my go-to competitive sport.

Jon Gaynor:

Any catch you're proud of?

Parker Lacoste:

Hmm, you know, it's been a little while, but every now and then you do hook a shark and, luckily, not one big enough to eat the boat or anything, but, you know, catching a decent-sized dogfish or something like that, that's always fun when you reel it up and see what's on the hook.

Jon Gaynor:

Well, that sounds really fun. Probably less fun is what's going on with EDGAR Next. Do you want to tell our listeners about that first?

Parker Lacoste:

Yeah, so back in September of last year, the SEC announced that EDGAR was going to be undergoing some changes, and I think the EDGAR filing system, as a lot of us know and use, is going to look significantly different here this coming year. So, in the past, any filer would obtain a filing code, a CIK, and they could share that information with their law firm's financial printers, who oftentimes would do 15Gs and other filings on their behalf. Now, under this new program, EDGAR , which the SEC has rolled out and went into effect starting on March 24, essentially any filer will have to obtain password-based credentials, and the existing filers will have a bit of a grace period where they can continue to use the current codes and sort of filing procedures that they're used to up until September 12. Any new filer, and I'm going to stop there to say that new filer just means any entity that has obtained a new CIK. So, you know, oftentimes our clients may have many filers under their umbrella, and each time they go out and obtain a new CIK. Under this process, they're going to have to use the new EDGAR Next system, they're no longer going to be able to use or share just a single set of credentials to access EDGAR. They're going to have to essentially designate at least two account administrators who will be responsible for kind of maintaining access to that filer's information. Those account administrators can then delegate additional filing authority to filing agents such as law firms or printers. But there's going to be some new management requirements and compliance requirements that are going to go hand-in-hand with that. Of course, there's a new website. Anytime we roll out something new, you got to have a shiny new website to use and, you know, shift up the way that people are used to doing things, and I think it's going to take some time for people to really get accustomed to this new process and sort of the new safeguards that are put in place to make sure that maybe this information isn't just being passed around to too many parties. So, we're really encouraging our clients, anyone that has to do regular filings through EDGAR, to talk to their law firms, talk to their printers, and get ahead of this, right? There is some time now in which you can start to use this new system, you know, to start to see how it all operates. But it's really important to get ahead of this, understanding that it will take some time to really wrap your hands around it.

Jon Gaynor:

That's super helpful. One thing you mentioned is that many folks who listen to this podcast, their exposure is probably mostly limited to either filing a 15G or even the kind of annual updates on repurchases. So all of that completed, I think, it was due in like February of this year, right?

Parker Lacoste:

That's right, Jon, the annual filing requirements are due by February 15, and then there's certain quarterly filing requirements that are due under certain situations.

Jon Gaynor:

Right. And so, for many folks, they really have a good deal of time before they have to do another filing where you have to worry about this new system. But if you're a new issuer with a new CIK, this is going to have to be top of mind, because if you're listening to this podcast, you have to register using the new system.

Parker Lacoste:

That's correct, there's a new amended form ID that they'll have to use, and the SEC has indicated that they expect it to take at least 10 days for them to turn around a new application. So, again, it's really important for folks to think about this in advance and get ahead of the curve.

Jon Gaynor:

Our team put out an OnPoint that goes into greater detail about all of this, and so if you're interested, you can check the show notes in order to read more. Also, reach out to Parker. He's a member of the task force and is great to work with. So I think that gets us on EDGAR Next. But you also had some updates to share about the corporate Transparency Act. After we finished recording about the Corporate Transparency Act, the administration released an interim final rule which updated things even further. So Parker, do you want to talk to us about what's new with the Corporate Transparency Act?

Parker Lacoste:

Happy to, Jon, and for any of those of you that are following along at home, over the past few months, it's been an exciting time in the world of the Corporate Transparency Act. There was a challenge in the courts towards the end of last year, which kept people waiting to see how the government would react, particularly with the new administration coming in. So, on March 2, the Treasury Department had announced that they were suspending the enforcement of the Corporate Transparency Act, which means that they would not be enforcing any of the penalties or fines against U.S.citizens or domestic reporting companies. And then, on March 21, FinCEN removed the beneficial ownership reporting requirements for U.S. companies and U.S. persons when they issued an interim final rule. The interim final rule has been submitted to the Federal Register with a request for comments, and upon publication, will establish a new timeline for foreign reporting companies to file their reports. So. existing foreign reporting companies that are already registered to do business in the United States will have 30 days from the date of publication of that interim final rule in order to file their BOI reports. And then for any foreign reporting companies that register to do business in the United States after the publication of that interim final rule, they will have 30 calendar days to file their initial BOI reports after receiving notice that their registration is effective.

Jon Gaynor:

OK, so on the scale of EDGAR Next to deep-sea fishing, these updates move the funness of this Corporate Transparency act a lot closer to deep-sea fishing than it was before all of this.

Parker Lacoste:

I think that's safe to say. Yes.

Jon Gaynor:

Awesome. Well, thanks very much, Parker, it was great to have you on the podcast.

Parker Lacoste:

Thanks for having me on.

Jon Gaynor:

Today, we have the pleasure of speaking with Gerry Brown, a partner in Dechert's financial services practice. Gerry specializes in asset management, particularly in the formation of closed-end funds, but also recently evergreen funds. His clients include institutional sponsors, middle-market sponsors, placement agents and investors recognized by Chambers as an up-and-coming lawyer in private equity fund formation. Gerry's expertise spans the formation of various kinds of funds, and in particular of interest to our audience, real estate credit funds. He also advises on corporate transactions, private equity investments and all sorts of secondaries. Gerry, welcome to the Dechert 4 Real podcast.

Gerry Brown:

Thanks so much, Jon. It's an honor and a pleasure to be here, and I'm really excited to be a guest on the podcast here.

Jon Gaynor:

Great. So before we get into the substance of current issues and trends in commercial real estate funds, it's our tradition here to also get 4 Real with our guests. So, Gerry, can you tell us about a competitive sport that you've done?

Unknown:

Yes, so in the last, call it five years or so, I started doing some triathlons, which have been quite a humbling experience. Honestly, in doing them, I've come to learn that triathlons are really designed by swimmers who are now bored with swimming and they would prefer to swim, bike and run. I kind of went at it in the reverse order, where I started running first, then biking, and then got kind of bored with those two and said, "Well, let me try to learn how to swim," which resulted in me taking some swimming lessons at our local Y, which was quite humbling. When I had told people I was doing that, you know, call it around 40 years of age, they said,"Well, you know how to swim." And I said, "Well, yeah, I can get in the water and get out without drowning." But, you know, I can't really swim effectively. You know, that was in the pool; and then open water swimming, for anyone who has done it kind of as a novice, is a whole different animal entirely. But I really enjoy them, because it's almost kind of like being a lawyer. There's always something you can work on and get better at and learn new tricks of the trade. And every time you do one, you get a little bit better than the one you had done previously. So it's really exciting. And then, actually, today, a friend of mine, who's also a lawyer, texted me about the Jones Beach half Iron Man this coming September, and we have tentative plans to do that together.

Jon Gaynor:

That's exciting. I hope you kick butt. I also learned that this is not your first time behind a mic. You used to host a college radio program?

Unknown:

That's accurate, and before doing this podcast, I had kind of forgotten about it, and then I was thinking about it, and it was in the recesses of my memory that, oh yeah, I have done something like this before with a friend of mine in college, and we did have our own radio show, both music and some banter. It was quite the experience and a lot of fun.

Ella Smith:

What kind of music?

Unknown:

Mostly classic rock. All right, which they call oldies now, but that's OK.

Gerry Brown:

That's accurate.

Sam Gilbert:

Ella, I think our jobs are in jeopardy here.

Ella Smith:

I know, right?

Sam Gilbert:

Let's see how the rest of this podcast goes.

Unknown:

I was gonna say, let's see how the rest of this goes, and then we can evaluate.

Ella Smith:

All right. Well, let's dive into our topic today, which is real estate debt funds. So Gerry, how are your clients finding the current fundraising environment?

Unknown:

So for real estate debt funds, it's been rather robust. I think, for other asset classes, particularly private equity, they've honestly struggled raising money the past couple years. But credit generally, and in particular real estate credit, for, I think, reasons we'll talk about, has proved pretty resilient in the fundraising market, and definitely the most successful fundraisers that we've seen recently.

Sam Gilbert:

Are there any sort of current market trends you could talk about?

Unknown:

Yeah, of course. And I think this goes back a little bit to, like, when Dodd-Frank came into play, and the banks came under some increased regulatory regimes, and they faced some challenges with respect to kind of running their business how they always had, and that has opened up space for alternative financing sources, including the real estate credit funds and our clients that we represent. So that has kind of created an opportunity for them to sort of fill that gap in the lending market. And then also a hot topic these days, especially in the credit space and real estate credit, is raising money from insurance company clients. They find it attractive, particularly because they want to get good regulatory capital treatment. And then this asset class typically allows them to achieve that, whereas if they're doing regular way LP investments in sort of a private equity fund, they don't get that same treatment.

Jon Gaynor:

There's also some synergies with, like, the work of our Dechert partner, Lindsay Trapp, and the kind of rated fund structures that she's doing, too. Yours are kind of like the more traditional fund structures. They're able to get those capital benefits even in these?

Unknown:

Yeah, depending upon how the fund is structured, that's true. And sometimes we'll do a regular real estate credit fund and then have just the rated note feeder for insurance company clients. And then, you know, sometimes we've also seen structures where the insurance company investors will hold their interest to, like, participation interests and instruments that allow them to get that better capital treatment.

Jon Gaynor:

That's super interesting. Can you talk about any recent performance trends, particularly in the real estate credit market?

Unknown:

Yeah, they've been strong performers. And I think these types of things tend to have a snowball effect where, if you have one fund that performs well, it helps your track record, then it helps you to attract more money for your next funds. And the lending market, as we talked about, and in particular for real estate, has been pretty robust, and a lot of that has to do with using, you know, real estate, The value of the collateral tends to fluctuate with market but, you know, there's always value there, and it's a little bit more certain than when you're investing if you want to contrast it to like a private equity fund investing in private companies. So, you know, we have seen pretty strong performance from our real estate fund clients recently.

Ella Smith:

Are there any specific sectors within the real estate market that are particularly attractive to credit funds right now?

Unknown:

Yeah, and in particular because with the rise of AI, like, data centers are really hot these days. Also, like, some industrial properties have been attractive, life sciences and also multi-family residential properties, we've seen a lot of our clients be successful in raising funds that invest in those asset classes.

Ella Smith:

So, like off-market office properties, this is really hot right now is what you're saying?

Gerry Brown:

Right. Exactly.

Unknown:

Seems to be a common theme, although we are sort of see it come back in my neck of the woods, in normal commercial real estate origination, it's starting to come back. But we're lawyers by trade, right? So a lot of our job is structuring things. What type of fund structures do you see recently in your space? Sure. So it seems like almost every client of ours at least wants to have a conversation about evergreen credit funds and evergreen real estate credit funds. And it comes from, I guess, a couple different angles and reasons as to why they want to do this. One is investors. A lot of investors don't want to go back to their own investment committees every, you know, five years or so to get approval for a new deal or new fund investment. So, what they want to do is just invest into a fund that has sort of unlimited recycling and that will allow them just to make, kind of, one investment and just kind of put it on autopilot. And then our clients, the sponsors, like it, because in their mind, instead of doing funds every five years or so, they just have to have one of these evergreen credit funds, or real estate credit funds in place. And then they don't really have to go through all the work to raise the successor fund, because they have this evergreen real estate credit fund that they can now use. You know, we see it work a lot. It is a lot of education, because a lot of these clients, as we talked at the beginning, you know, I kind of focus most on closed-end funds, and so, you know, they're not necessarily set up to have an evergreen vehicle that has constant turnover of investors, people coming in and out of the fund. They may or may not already work with an administrator, but they definitely need a third party administrator if they're going to have an evergreen fund, just to manage all of it from an operational perspective. But evergreen credit, real estate credit, very hot these days, everybody wants to do one.

Jon Gaynor:

It might be worth pausing on this idea a little bit and exploring it a little more. I've heard of closed-end funds. I had heard of open-end funds. As I understand it, evergreen funds kind of straddle a difference between what we traditionally consider closed and an open end. Can you just discuss that a little bit and explain?

Unknown:

Yeah, sure, absolutely. So, they come under several different flavors, and there's really not necessarily a market for all of the terms yet because people are, you know, while they've been doing them, there's just not kind of an established market for it. And like we said, it's more of, like, a hybrid structure. And a lot of the liquidity terms are driven by the investors, and do they really want liquidity? And sometimes it can look almost like a hedge fund, but the assets, you know, aren't hedge fund assets. So, there is a little bit of a dance between how much liquidity we can provide on a realistic basis. So, we see a lot of like, you know, what we call, like a slow-pay mechanic, where, you know, if an investor wants to redeem out of the fund, we'll give them cash. And different sponsors take different positions. As far as how much cash someone can get, is it just, you know, can we take any cash that's in the fund and use that, or is it really just the investors' pro rata piece of the cash that's in the fund? And then how do you deal with illiquid investments? Typically, what people do is they kind of put it into a runoff account and, effectively, what you're doing is kind of stopping the investment period for that one investor, and then as the underlying loans are realized, then that investor who redeemed gets paid out over time, and that's probably the most common way to do it. And that's what we try to counsel our clients to do, instead of putting them into more aggressive positions where they have to provide liquidity on a short time frame. And so, what we end up trying to do is match what the investor wants with what's possible given the asset class that the Evergreen fund is going to invest into,

Jon Gaynor:

that's super helpful as an overview. When you are deciding on an investment strategy for these real estate credit funds, what do fund managers do?

Gerry Brown:

It varies, but typically it's based on market conditions. So for example, we made a little bit of a joke about Office properties, so that's probably not going to be a target asset class today. But so they look at market conditions. And you know, what is attractive in the sector, what sort of goals with respect to returns that investors have, and then what the manager is good at, where their expertise lies. And you know, do they have to raise money, but then also hire some sort of operating partner to actually manage the investments, because they may not have the particular expertise in that area. And then you look at geographic focus, property types, you know how much leverage the fund is going to use, and different sort of return profiles in order to kind of achieve what the investors are looking for in their fund experience.

Ella Smith:

Can you talk to us a little bit about what the primary risks are that are associated with investing in these real estate funds? So

Gerry Brown:

I think it kind of falls into three main buckets. One is the credit risk of the underlying properties, interest rate risk and market risk.

Ella Smith:

And how do fund managers mitigate these risks? Generally?

Gerry Brown:

First and foremost, there's a heavy amount of due diligence they do with respect to the assets they're going to lend against to make sure that they think it's going to perform properly. And there's no hidden liabilities in there, any fund manager is going to do a heavy amount of diligence on whatever they're invested into. But in particular real estate, it's, you know, very important to have a robust diligence program and then diversification. So investors will often, you know, we'll always build it in up front as to how much of the fund can be invested with respect to a property, and it can get pretty complicated, because, as you know, when you're doing the deals like you might buy a couple different properties and then roll them up kind of into one investment, and then invest using leverage that is collateralized by, you know, several different assets together. Is that one investment, is that multiple investments for purposes of your investment diversification limitations that are in the fund documents so it gets negotiated, but that's a way to manage the risk there. And then one feature we've seen more and more often is, and in particular in sort of the residential space, is securitization, where you know, once they have, like an adequate number of loans. They might securitize them and then sell them off to market participants, but then sort of retain the subordinated piece themselves for the fund, and then for the interest rate. It's typical for our fund clients to engage in some sort of interest rate hedging as well.

Jon Gaynor:

Do you see these Investment Management. Limiters and like risk tolerances for the funds. Can they change over time? Are they fixed at the time the fund comes together?

Unknown:

That's a great question, and that ties into sort of the evergreen model, where, if it's just a straight-up, regular, closed-end fund, then the answer is pretty much no. There's no ability to kind of change your investment objective or your investment limitations. It's pretty much set in stone with the evergreen funds. We do try to build in some flexibility so that the fund and the manager can be nimble and change over time. And you kind of need it in those types of funds, because they're going to be around forever, in theory. And then if investor decides for whatever reason that they're unhappy with the way either the fund's performing or the changes that the manager wants to make, they can always redeem out. An interesting aspect of kind of an evergreen fund is it tends to make negotiations with investors a little bit easier than it is in the closed-end fund, because, you know, if they're asking for certain things and we're not willing to agree to them, we can always say, "Well, you have the ability to get out of the fund," which not a lot of those investors are used to having. So it's actually a helpful negotiating tool to use to address, you know, concerns that investors have when they are negotiating their investment into the product. Putting my investor hat on for a little bit, we've been talking about managers for a little bit. Obviously, who the manager is, I'm sure, is a critical piece of this. But are there any other sort of particular items or terms that investors tend to focus on when they're deciding whether or not to invest in one of these funds? One of the big ones is how much leverage the fund is going to use and what it's going to be used for, and that obviously goes to the risk that the investors are taking when they invest in the fund. So some of them can be pretty highly leveraged, like three to one in investors, when they're looking to make these investments in, you know, the real estate credit space, they're looking at it as a more conservative investment, right? It's not a VC fund, it's not a PE fund. They want some certainty. So a lot of times, you know, they'll negotiate some caps on the leverage, because, yes, it can perform really well and everybody wins, but the more leverage you have, obviously, the more downside there is potentially. So, it takes what looks like a relatively conservative fund investment, and kind of changes the profile of it. And so, they definitely negotiate caps on leverage. And then, from the sponsor side, we want to make sure we have the appropriate carve outs, and those are driven by what type of real estate we're investing into, like other, you know, completion guarantees, or there are sort of bad boy guarantees that aren't really leverage, but could increase exposure if things go south. But we typically carve those types of things out of the leverage caps. And then, as we had talked about too, if we're talking about an evergreen vehicle, then investors, depending upon how focused they are on getting out of the fund, they'll negotiate different types of arrangements for liquidity and how quickly that they can get their money back when they put in a redemption request. And then, obviously, economics are important, so they'll negotiate fees, and especially, like, when we're talking about the fund using leverage, is it appropriate for the manager to earn fees on the borrowed money that they're using? Most of our clients take the view that, yes, we're investing the money and we're giving the returns to the investors, so we should be entitled to fees on that. And for the by and large, they're rather successful in taking that position. Some of the clients say, "No, we're we just charge the fees on the equity that's invested. That's what we do, and that's our position." But that definitely gets negotiated. And then one other aspect of these funds that you don't see in other types of funds is a lot of our clients have, like, an affiliated real estate service provider or a loan servicer, and a lot of times they'll want to take the view that, well, we could hire a third party to do that for us, and we would charge that to the fund. So instead of doing that, we can charge that to the fund, and we'll take our fees from that. So the fees are a little bit higher kind of in that regard, than it would be for funds that invest in a different asset class that don't necessarily, you know, the assets don't require that same sort of service providers.

Jon Gaynor:

That's interesting, because, like, if you get certain kinds of leverage, if you are an affiliated servicer, like on a repurchase facility, you can be terminated by the bank. If you're in a bad situation like, it could be a default, it could be any other thing like that. So it's like those kind of terms, which are very common, can be more painful in that circumstance. That's just an interesting connection. I'm curious. Now, we've been talking a lot about evergreen funds. Why might someone prefer a closed-end fund structure to an evergreen fund?

Unknown:

So from the sponsor side, could be a couple different reasons. One is, it's just because that's what they're used to, and that's how their other funds are structured. And evergreen funds can be complicated when you have investors coming in and out at different times. And each investor, when they come in at different times, going to have a different NAV than another investor who came in at a different time than it did when it started. So, the performance fees calculations are wildly more complicated than they are in a traditional fund that has a regular cash distribution type waterfall, all the investors are in all the investments, pro rata, the fund's going to make 10 to 20 investments, whatever it is, and it's a finite period. So, simplicity on the traditional, closed-end side is a definite plus for a lot of our clients. And then, not that we'd like to think about this too much, but if a fund happens to perform in a less desirable fashion than our sponsor would like it to, it's going to end at some point. They don't have to live with it forever. And they can, you know, at the end of the fund's term, they wind it up, and they can start again with an evergreen fund. It's your fund. There's no successor fund, and if some of the investments go poorly, it can be difficult to continue fundraising for that fund. What we have seen one client in particular do was they had some underperforming assets, and they put those in what is effectively a side pocket. And they were doing this because it was hurting their fundraising to have those assets in the fund. And so, they created this structure and moved some of those assets outside of it, the investors that are in the fund today participate in those deals, but new investors did not. So the idea was kind of to bifurcate and have the new investors not participate in those underperforming assets. So again, if this was just your regular closed-end fund, you wouldn't really be able to do that, or you wouldn't really want to do it, but with an evergreen structure, investors kind of understand that, like, well, this is better for the fund. I'm going to be in this for a long time, and so I'm willing to agree to this. If it was closed-end fund, you would probably have a tough time getting investors to consent to that, because they're not thinking about the fund for 30 years. They're thinking about it for the next five to seven years. So as one of those investors, they do take the view that I really don't care if the sponsor can raise more money, because it's really not going to be that beneficial. But when you when you're thinking about it from like, call it like a 30-year time horizon, potentially it just changes the way investors think about it.

Jon Gaynor:

When you do these kind of bifurcations, is it still that the fund, in the aggregate is subject to the risk because, you know, if you're financing, for example, an REO asset, which is an underperforming asset, it's one that has kind of different risks. If investors don't want exposure to that, that's fine from the perspective of allocating the risk at the top level the fund, but your counterparty, if the fund is on the guarantee or is, you know, a party to the financing, they still are looking at the funds. Do you have like a risk allocation mechanism that like limits and separates? How's that work?

Unknown:

Yes. So in that situation, we can call it like a rebalancing agreement or contribution agreement, whereas behind the scenes, the two different funds at that point will make each other whole in the event that the party that really shouldn't be paying for the debt on the bad assets ends up doing it. So, behind the scenes, there's kind of like, call it like a make whole agreement, or whatever you will, to rebalance those payments accordingly. That makes good sense.

Ella Smith:

So, Gerry, what do you see as the future for real estate credit funds?

Unknown:

I think it's a bright outlook. There's been a lot of talk about the private equity market coming back, and I think a lot of people want to talk about it in sort of to kind of maybe manifest that it will. So only time will tell if that's going to be true this year or not. But we don't see any reason why the real estate credit market isn't going to continue to grow like it has been. Banks, even with the new administration, that are still pretty highly regulated. And whereas, you know, our clients that raise these types of lending funds are, you know, they're a lot less regulated, and so they're a lot more nimble, and they're able to take advantage of a lot of opportunities that are in the market as a result. And I also think as innovations and property technology and data analytics continue to progress and improve, over time we're going to see a lot of our clients being able to perform the diligence that we talked about earlier when underwriting loans and managing new portfolios in a more efficient manner, and it should reduce costs as well and allow them to move quicker when doing deals, and also be able to do them more efficiently and cheaper. I really do think it's a strong environment for this asset class, and I imagine it's going to continue to grow for some And so you mentioned earlier on, AI. You can't talk about the time. future, obviously, without talking about AI. You mentioned the growth of data centers. But how do you think technological advances will impact these real estate credit funds going forward? One thing we've seen recently is the increased use of tokenization, and that can be applicable for other funds that focus on other types of asset classes as well, but it allows just increased transferability. If instead of an LP interest, it's a token that's sort of traded on an exchange. And so I do think that we're going to see more of that in the coming years as well. So I think that's probably going to be one of the bigger changes we see, for these types of funds going forward.

Jon Gaynor:

Oh, good. My fund stakes can be stolen out of my bitcoin wallet, yay. All right, well, Gerry, thank you very much for joining us for this episode. We are really glad to have had you.

Unknown:

Great. Thanks so much, Jon and Sam and Ella. It's been a pleasure.

Jon Gaynor:

OK, so before we wrap up, let's do our 4 Real High Fives. Anybody have anyone they want to call out?

Unknown:

My High Five goes to the astronauts that were in space for several months, and they finally were returned to our planet Earth yesterday, and we wish them the best in their recovery.

Jon Gaynor:

That is a really good High Five and, golly, a nine ... ehat was it? A nine-day stay turned over into nine months. So really crazy.

Unknown:

Everyone's had the experience right of missing a flight at the airport and then you're sort of knocked off course for a couple hours, but these poor guys were up there, and they had the Boeing ship leave without them, and they were there for nine more months. So glad they're back.

Jon Gaynor:

That is quite a layover. Thank you to our

Ella Smith:

Gerry, we gave you prior notice of this. Did you audience for joining us for another episode of the Dechert 4 bring a dad joke with you? Real podcast. If you have any thoughts, please share them with

Unknown:

I did. Unfortunately, it's not April Fool's themed, but I'll share it anyway. Why did the banana go to the us at our email inbox, realpodcast@dechert.com Also, if doctors'? you like what you heard, or you have a scary story about a long layover you suffered, please give us a five-star rating on whatever platform you found this on and tell us about it. This episode was hosted by Sam Gilbert, Ella Smith and me. Jon

Ella Smith:

I don't know. Why? Gaynor, it was produced by Stewart McQueen, Matt Armstrong and Kate Mylod. Production support is by Kara Ray, Mallory Gorham, Alyssa Norton, Peggy Heffner, James Wortman and Jacob Kimmel. Our editor is Andy Robbins of AudioFile Solutions. Thanks for listening, and we'll see you next time on the Dechert 4 Real podcast. All right, for fun, it's dad joke time. Anybody have any April Fool's themed jokes?

Unknown:

Because it wasn't peeling well. I have to give credit to my son for that one. He told me that the other day,

Ella Smith:

Love it.

Gerry Brown:

So it's more of a son to dad joke versus a dad joke. But I thought it was fitting, nonetheless.

Jon Gaynor:

Raising the next generation of dads, maybe. You definitely got the assignment. I appreciate it. Anybody else have one?

Ella Smith:

I don't know any April Fool's dad jokes. I mean, Jon, do you?

Jon Gaynor:

Well, it's funny. I was gonna, like Google one, because I didn't have one either, and most of them just

Ella Smith:

Perfect, I'd love to hear it.

Jon Gaynor:

All right, so I told a chemistry joke in honor of inserted April Fool's somewhat awkwardly into another dad joke. April Fool's Day, but it didn't go well.

Ella Smith:

What happened? So I'll do one of those.

Jon Gaynor:

Well, it didn't get a reaction.

Ella Smith:

Oh, man, I always give a reaction to these jokes, so they're always going to go well with me

Unknown:

And Ella, I do have another one. Sort of a bonus on the jokes, but it's relevant because of your new golfing hobby. What does the acronym golf stand for?

Ella Smith:

Oh, I can't even imagine.

Unknown:

Get out, leave family,

Ella Smith:

Absolutely, but I tend to take my entire flock with me. I'm forcing the children into this, and my husband's already a golfer, so get out and ... I'm gobf. I'm bringing family. I

Gerry Brown:

think you just invented a new sport.

Ella Smith:

Yeah. Gobf.