Brasa Capital Management closed its first debt fund, Brasa Credit 1. The debt fund will provide debt and equity for business transactions of up to $100 million. The debt fund is backed by pension fund investors and has already closed its first two deals, a $16 million preferred stock investment in a multi-family development in Denver and the acquisition of an underperforming rating of $4 million secured by a mixed-use asset in Los Angeles.
“Before COVID-19 hit, unprecedented liquidity in the market after a 10-year economic expansion resulted in underwriting assumptions requiring everything to go perfectly for a deal to work,” Greg Galusha, managing director of Brasa Capital, tells GlobeSt.com. “We were becoming increasingly uncomfortable with valuations and our exposure to value; we decided to move down the risk curve to a more conservative position in the capital stack. Raising a credit vehicle would allow us to obtain more attractive risk-adjusted returns. »
Following the pandemic, Galusha says there is a growing demand for capital sources to provide liquidity to struggling homeowners. “Debt markets were pulling back and cash flow was interrupted,” he says. “Existing owners needed to raise bailout funds to bring their projects back to stabilization when the pandemic ended, and we knew our credit vehicle could meet that need.”
Brasa’s long-term strategy is all about flexibility, and this business model will serve it well in this unexpected cycle of recession and recovery. “We always thought there was a lot of value in being flexible across the capital stack,” Galusha says. “When brokers and sponsors submit funding requests, having a wider range of capital solutions allows Brasa to be selective and creative in its response after assessing risk and assigning pricing based on risk profiles. cash flow and value exposure.”
Specifically, the debt fund strategy will focus on capital needs, including acquisitions, recapitalizations, repositionings and top-to-bottom developments in the Western United States and Texas. “We focus specifically on the middle market, issuing checks from $5 million to $25 million per opportunity,” says Galusha. “The vehicle gives us the ability to acquire distressed debt, issue bridge loans, and provide preferred stock and mezzanine debt on most asset types.”
Overall, the pandemic hasn’t changed the strategy, but Brasa will of course proceed with some caution. “We’re definitely focusing more on markets closer to home that don’t require us to fly,” says Galusha. “But again, we’ve always been optimistic for Southern California. It’s one of the best investment selling markets in the country, so there’s plenty to do right here in our own backyard. I think the only other change we’ve made due to the pandemic is that we’ve reduced our exposure to the bottom dollar – we’ve become more conservative on that front.
Although the pandemic has not changed strategy, it has changed demand. Rather than acquisition requests, Brasa mostly sees recapitalization requests. “The majority of capital requests are for the recapitalization of existing agreements with equity to fund carry costs and planned capital expenditures,” says Galusha. “Equity is needed in this market as it now takes longer to stabilize assets, longer to lease them and some loans require repayments to make extensions. Some projects do not service their debt and borrowers prefer to raise preferred/mezz equity since our capital is generally cheaper than what existing investors would charge for more common equity. We are also seeing increased demand for debt funds, particularly in the middle market, where we specialize. These smaller deals typically have equity investors without large institutional resources and the need for capital like ours is greater. »
The debt fund will keep the company busy for the next 12 months, but it is also already planning its next steps. “Our goal is to fully deploy all of our capital in our initial vehicle and build a diversified portfolio by asset type, geography and risk,” Galusha says. “At the same time, we hope to raise a follow-on fund from existing and new institutional investors.”