Private Credit

An opportunistic strategy for income-focused investors

Our new private credit investment strategy capitalizes on the changed economic environment, offering some of the most attractive potential risk-adjusted returns of the past decade.

Why Private Credit

A once-in-a-decade lending environment

The Federal Reserve has maintained higher interest rates after having raised rates at unprecedented speed in an effort to control inflation. This initial aggressive policy shift led to destabilization in many credit markets, resulting in widespread dislocations, systemic strain, and the emergence of potential liquidity risks that continue today.

These conditions have created what we believe is one of the most compelling environments for credit investments in the past several decades.

What is private credit?

Private credit (or private lending) is an asset class that consists generally of loans, fixed-income, or other structured investments that aim to deliver higher yields with lower overall risk when compared to equity investments. In other words, investors in private credit are lending money to borrowers in exchange for a fixed rate of return (often captured in the form of an interest rate or preferred return) but typically do not have any equity ownership or upside participation. Similar to other private market assets, private credit differs from publicly traded credit or fixed-income investments, such as bonds or asset-backed securities, because it is illiquid and consequently aims to deliver a higher relative return.

The profitability of preparation

As a result of the Fed's ongoing policies, it is still nearly as expensive to borrow money for 30 days as for 30 years. This continued flattened yield curve is an unnatural state of affairs that has led to an ongoing liquidity crunch that we call The Great Deleveraging.

During this period, many individuals and companies have been forced to borrow money, especially in the near term, at significantly more favorable terms for investors. Higher interest rates generally means that borrowers are borrowing at much lower leverage (which means lower risk). Loans reaching maturity during this cycle often require substantial paydowns, and for new loans the gap between the expected and actual proceeds means many borrowers are resorting to the use of “bridge” or “mezzanine” financing.

This has created an opportunity for investors who have been diligent and chosen to maintain larger cash positions during these times, putting them in the enviable position of being able to demand significantly more return in exchange for providing liquidity during what we expect is likely to be a temporary (although longer than initially expected) period of realignment.

At Fundrise, we aim to take advantage of this dynamic for our investors to drive stronger returns during what remains a highly uncertain environment.

Important Note: In our experience, these types of unique investing environments are short-lived. Accordingly, our expectation is that the current period of disruption is likely to close as rates come down.

Source: Historical Treasury rates sourced from St. Louis Federal Reserve Economic Data (FRED). Forecast based on FOMC projections for the Fed Funds rate and Fundrise internal analysis of Treasury spread behavior from historical yield curve inversion events.

$930 million

Capital Deployed into Debt Projects

138

# of Deals

23,923

# of Units

11.5%

Avg. Net Interest Rate

about the assumptions of this section, or view full disclosure.

About our strategy

Market dislocation creates opportunity

The opportunities created by the Great Deleveraging are unique in that nearly every borrower and every asset (regardless of credit quality) are impacted, hence the name “Great.” No matter who you are, if you were active in business over the past several years then you were inevitably borrowing to some extent. And if you were borrowing at all, then you were borrowing at low rates and relatively high asset values.

Now that the environment has shifted, regardless of the quality of the underlying asset, as loans mature and come due, there will be a gap created during the refinancing period where new equity capital must come in to pay down the overall size of the loan.

Funding the gap

Our strategy is to focus on bridging the funding gap and providing rescue capital to borrowers in the midst of the liquidity crunch. By lending into the gap, we are able to invest at a healthy margin of safety, concentrating on high-quality assets with creditworthy borrowers—those who are experiencing circumstantial liquidity needs as a result of interest rates rising so rapidly through 2022 and 2023.

In these instances, the underlying assets themselves are typically unaffected by the financial turbulence happening in capital markets. Most frequently, the borrower is in the middle of a business plan to enhance the value of the property, such as new construction, renovations, or lease-up, and simply needs more time to reach stabilization and be ready for long-term, fixed-rate debt.

Examples of this kind of activity include:

Originating and structuring real estate loans, including senior mortgage loans and subordinated mortgage loans
Providing mezzanine financing in the form of preferred equity, B-notes, or second trusts
Sizing the mezzanine or preferred loans to a GSE (e.g. Fannie Mae or Freddie Mac) exit
Financing residential construction and development
Acquiring subordinate notes and high-yield investments in the asset backed securities market,—single family rental portfolios, in particular

Focusing on the markets we know best

In terms of location, we will primarily target high-growth markets in the Sunbelt like Dallas-Fort Worth, Phoenix, Orlando, Tampa, Houston, Atlanta, Charleston, and Las Vegas. These are the markets we know the best: approximately 70% of all Fundrise acquisitions from 2021-2022 were in the four fastest-growing states—Texas, Florida, North Carolina, and Georgia—and more than 90% were within the Sunbelt.

We believe that by maintaining rigorous credit underwriting with a heavy emphasis on residential rental properties, we have the opportunity to achieve some of the best relative risk-adjusted returns since the aftermath of the Great Recession in 2008.

Example project

Waypoint

As part of our new private credit strategy, we’ve invested roughly $20.8 million to provide financing in the form of preferred equity for the development of the Mason at Daytona Beach, a 300-unit multifamily community on 65.4 acres of centrally located land in Daytona Beach, Florida. Under the terms of the investment agreement, the borrower has agreed to pay us a 13.5% fixed annual rate that will accrue for as long as it takes to finish the project, and our investment will be paid back upon its completion. This is one of many projects in the Fundrise Portfolio.

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During this time, we have also worked with a majority of the top banks, sponsors, and capital brokers in the market, establishing a reputation as both a good partner and, importantly, as a partner who is not a "loan-to-own shop," seeking to prey on distress. As a result, we've become a sought-after capital source and developed a robust pipeline of deal flow tailored specifically to this type of opportunistic lending.

Our banking and real estate partners

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