M Capital - Private Property Equity at Work

By: M Capital  11-11-2011
Keywords: Property Developers, Debt Providers, Senior Debt Provider

M Capital offers the following products to property developers and investors in Southern Africa:

M Capital is able to offer short term funding (3 to 6 months) to developers and is usually able to respond to a developer’s needs in shorter time scales than those available from most of the senior debt providers in the market.

The investment size ranges from ZAR2,0 million to ZAR20,0 million with an average term of 3 to 6 months.

The need for bridging finance by property developers usually arises to fulfil a short term need for cash flow (3 – 6 months) where the developer may be awaiting on the proceeds from other developments-in-progress, or where the developer may be awaiting upon fulfillment of outstanding conditions to trigger the provision of senior debt funding for a specific project.

The purpose of the funds may be to secure a new property acquisition or be used to continue with a specific project where senior debt is already in place, but where the senior debt may be conditional upon one or two outstanding conditions in order to trigger the flow of funds from the senior debt provider (where for example the quality of the pre-sales required by the senior debt provider may not be 100% to the satisfaction of the senior debt provider).

In all instances M Capital would look to a secure pre-defined exit – this would either be from the proceeds of developments-in-progress, or from senior debt provider upon fulfillment of various conditions.

All secondary debt finance investments are asset and/or cash flow backed and secured by a second charge over the subject property, as well as a personal surety.

The investment size ranges between ZAR5,0 million and ZAR10,0 million with an average term of 12 months.

M Capital is acknowledged as having a robust credit culture where risk is identified, and where suitable mitigates are put in place. This could entail minor adjustments or an enhancement to the current senior debt package, which would be for the benefit of all parties.

The need for Mezzanine Finance

  • Senior debt providers typically lend between 50% and 80% of a developer’s capital requirement
  • The remaining capital component must be financed or raised by the Developer
  • The majority of a developer’s liquidity is usually tied up in projects under construction resulting in a need for mezzanine finance
  • The introduction of mezzanine finance for the equity component in a project provides the following benefits for a developer:
    • Major increase in the developer’s Return on Equity for that specific project,
    • Mezzanine increases a developer’s capacity to invest in other projects and therefore facilitates a spreading of risk
    • Equity funding is usually more scarce and more expensive in the long term;
    • The mezzanine partner provides the developer with greater flexibility compared to an equity partner.

The majority of our investments are sourced through an existing network of personal contacts in the South African property industry, a network which has been developed over many years.

The need for equity finance usually arises from developers who have identified projects demonstrating higher than average returns, and who are prepared to dilute risk and reward by means of introducing an equity partner into their development company.

The benefits of equity finance include a major improvement in the developer’s Return on Equity, as well as increasing the developer’s capacity to invest in other projects.

These developers would look to providers of equity finance as a means to dilute risk, in return for which they would be prepared to offer a shareholding in their project.

M Capital will generally invest in property development and investment companies with the following characteristics:

  • Excellent management team committed to making a meaningful investment in the business;
  • Management team with a proven track record in the industry;
  • Senior debt in place and provided by a leading financial institution prior to disbursement;
  • Defined minimum security requirements ranking behind the Senior Debt provider;
  • Existence of a clearly understood and creative business plan that reflects highly visible profitability; and
  • Identifiable exit strategy at the time of investment, usually through pre-sales, or a re-structure of senior debt to settle equity.

For transactions requiring a larger equity component M Capital would entertain co-investing with other credible financial investors and work with them in a complementary way, however, we require representation on the Board and negative control.

The concept of ‘land banking’ applies to the acquisition of raw land with the intention to re-zone and or sub-divide the land, in order to maximize the intrinsic value of the land.

Senior debt providers generally lend between 50% and 60% of the purchase price of such land, resulting in an equity component to be funded by the developer.

After satisfactory assessment of the likelihood of a successful re-zoning / sub-division process by the M Capital Investment Committee, M Capital is able to provide financial assistance to developers who have acquired land for land-banking purposes.

The investment size ranges between ZAR2,0 million and ZAR15,0 million with an average term of 12 to 18 months.

Keywords: Debt Providers, Property Developers, Senior Debt Provider, Short Term Funding,

Other products and services from M Capital

11-11-2011

M Capital - Private Property Equity at Work - default

An investment by M Capital into a project includes the transfer and exchange of skills in the financial and credit arenas, as well as assistance with the mechanics of the draw-down process, ensuring a smooth and efficient disbursement of funds from the senior debt provider.