How Debt Funds and NBFIs Help Capital One Grow Its Customer Base

While one might not expect a major bank to work closely with non-bank financial institutions (NBFI), Capital One sees their value in helping to provide further advantages to its commercial real estate business and its customers. Partner Insights spoke to Josh Howes, head of institutional specialties for Capital One CRE, about what NBFIs have to offer Capital One and its customers. 

Commercial Observer: What are some of the key factors these days driving the growth of debt funds and NBFIs?

Josh Howes: There are two main factors driving growth among debt funds and NBFIs. One is the continued institutionalization of real estate. Today, CRE debt has become an accepted portion of an institutional investor’s credit or fixed-income portfolio. 

Second, the persistence of low interest rates globally has contributed to this growth. Low interest rates have forced institutional investors to seek out other alternatives for yield, and commercial real estate debt provides high relative value compared to other non-CRE-related credit investments.

Describe the general relationship between banks and NBFIs, and how the relationship has changed over the years.

Prior to the great financial crisis, non-bank investors and debt funds were primarily focused on investing in subordinate investment structures, like mezzanine loans, B-notes and non-investment grade CMBS [or commercial mortgage-backed securities]. They would work with a bank — primarily investment banks — to warehouse those investments and then exit into the CDO [or collateralized debt obligation] market. 

That ended with the great financial crisis when it became clear those transactions, and the risk and the leverage in them, were not sustainable. However, it provided the opportunity for institutional capital to come into the real estate financing market in a more traditional, lower risk form. 

Today, debt funds are primarily focused on traditional mortgages. They’ve moved down the risk spectrum, which means they can work with experienced banks in a more traditional borrower-lender relationship. They can access banks for permanent financing to finance their positions. And to the extent a debt fund or an NBFI wants to tap into the CLO [or collateralized loan obligation] market, they can work with a bank that’s experienced in that space as well. So, it’s developed into a broader relationship that includes traditional bank financing as well as capital market executions.

Talk about how Capital One works with debt funds and NBFIs.

Some banks view debt funds and non-bank lenders as competitors. At Capital One, we view them as key market participants who we can work with in a variety of ways. First and foremost, we view them as important customers. We finance their operations with a broad and dedicated set of financing products for both their assets and the funds themselves, and we provide other banking services like treasury management. But we also work alongside debt funds and NBFIs in certain instances to finance our other customers.

Our debt fund portfolio is of strategic importance, and we’re looking to grow it. It’s an efficient arrangement where we can engage the origination network of debt funds, finance them and generate awareness among new sponsors. We’ve also leveraged our relationship with debt funds to provide capital to our own customers that have financing requests outside the norm for us. Our debt fund partners can hold the piece of the capital stack that’s not a fit for our balance sheet. Through this network, we’re able to provide creative solutions for our non-debt fund customers as well.

What are some of the more creative financing solutions Capital One has developed with such institutions?

When we first entered this space, the marketplace was rigid. To differentiate from the market, we developed our flagship master repo product to be flexible and fee friendly. It provides match-term funding, so our customers are not faced with any mismatch between their asset and their financing, and we only charge fees based upon usage, recognizing the uncommitted nature of the facility. This product allows us to efficiently finance multiple loans across a diverse set of property types, business plans and borrower profiles.

How do you ensure that Capital One and NBFIs align their respective appetites for risk?

Prior to onboarding a debt fund customer, we spend a lot of time ensuring alignment between our respective credit strike zones. We talk to them about our credit appetite and have detailed conversations around their typical deal profiles, structures and return requirements. That way, if we’re spending resources putting together a financing facility, both parties have the confidence the facility is going to be utilized. Having those conversations up front makes for a better experience for our clients.

Talk a bit more about what advantages those collaborations have for Capital One customers.

With our debt fund customers, we view the relationship as a two-way street. We finance them, and they can help us strategically grow. By working alongside debt funds, we can synthetically extend our balance sheet and finance assets that we otherwise would not.  There have been many instances where we’ve seen a financing request with a customer and asset that we really like, but at a leverage point that was outside of our strike zone. We can pre-identify these loans with our debt fund customers and collectively work together to provide the financing.  

How is Capital One philosophically similar to institutions like debt funds and NBFIs?

Debt funds often pride themselves on being fast and nimble. Likewise, Capital One’s strategy is anchored in delivering flexible financing solutions to our debt fund and NBFI customers in a very efficient and responsive manner. We have developed a product suite that allows us to deliver across the financing spectrum in a very thoughtful and bespoke way. Our solutions can be customized to respond to clients’ strategies, sensitivities or constraints. We’ve also invested significantly in our internal infrastructure and processes to ensure we can execute in an efficient and seamless manner.

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