IRR on mezz is around 14-25% depending on the deal and on this one am sure they stitched in a profit share formulae since they are probably the ones who put in risk capital....soo not sure what the problem is. If you watch the PE market closely they do have "a few slam dangs"; I have seen a lot of these in the UK and these sorts of returns are not an usual from top tier GPS. ..I would say these guy's were simply lucky on their first deal. They are playing in a high risk segment of the market so when things work you make a lot of money...chances of loosing money are equally high.
On that note people think Centum made money on UAP (still believe it was the deal of the decade in KE)...look closely at swedfund and Africinvest who exited at a handsome premium after investing for about 2 years...the IRR on these was probably north of 40%.
What I hear even from the Asian elite is that the team at cytonn sold 80% of the houses before they broke ground. ..the guys are good at the hype and they too have a good product....the one at ruaka is another "slam dang".... on a portfolio basis am sure they will have a few bad projects. ....it always does happen...even for the best GPs
As we all know how do developers make money? A significant part of the return is made during the land banking and project conceptualisation stage…. Very little is made after you break ground.
However I suspect they may have also used customer deposits, the regime appears to allow developers to spend customer deposits as they deem. ..that will change over time; it is being abused.
I am not sure bank lending would be significantly cheaper given where they are from a track record perspective. Construction loans are attracting kshs rates north of 18%.
What I have seen in recent structuring of real estate deals is outlined below:
I) The financial sponsor lends money to the JV at 16-20% target IRR. Entitled to 50%...25% if they finance the acquisition of land and 25% if they provide equity or risk capital.
Ii) The above structure thus allows the financial sponsor to get 50% of the profits once exit is achieved over and above the interest rate. This is the kicker they are using to push their returns north of 35%.
Iii) The developers initially sweat their way into the JV through a number of milestones. ..say 25% when land and approvals are sucured and the remaining 25% on financial close.
Iv) The developer does make some money by charging project management fee; but this keeps the office running and it is not where the money is. The developer does not inject any money....they literally sweat their way into 50% ownership of the JV; the incentive is that on exit they will walk away with 50% of the profits after lenders and the financial sponsor has been paid.
As you can see the financial sponsor has a good deal however if the developer read cytonn manages to deliver a profit after interest of 10% on a project worth 10 billion, dande will walk away with shs1billion. Am sure this is what is keeping his team awake,the incentive structure is just wonderful to the sponsor. ...
So the boy from Lehman brothers knows what he is doing.
The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday's logic.