Brasa Capital Management has closed its first debt fund, Brasa Credit 1. The debt fund will provide debt and equity for commercial deals of up to $100 million. The debt fund is supported by pension fund investors and has already closed its first two deals, a $16 million preferred equity investment in a multifamily development in Denver and the acquisition of a $4 million sub-performing note secured by a mixed-use asset in Los Angeles.
"Before COVID-19 hit, the unprecedented liquidity in the market following a 10-year economic expansion resulted in underwriting assumptions requiring everything to go perfectly in order to make a deal work," Greg Galusha, managing director at Brasa Capital, tells GlobeSt.com. "We were getting 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 make more attractive, risk-adjusted returns."
Following the pandemic, Galusha says that there is increasing demand for capital sources to provide liquidity to distressed owners. "The debt markets were pulling back and cash flow was being interrupted," he says. "There was a need from existing owners to raise rescue capital to carry their projects back to stabilization at the end of the pandemic, and we knew our credit vehicle could fill that need."
Brasa's long-term strategy is focused on flexibility, and that business model will serve it well in this unexpected recession and recovery cycle. "We've always thought that there is a lot of value in being flexible across the capital stack," says Galusha. "When brokers and sponsors pitch their funding requests, having a broader range of capital solutions allows Brasa to be selective and creative in its response after assessing risk and assigning pricing based on cash flow profiles and exposure to value."
More specifically, the debt fund strategy will focus on capital needs, including acquisitions, recapitalizations, repositionings and ground-up developments in the Western US and in Texas. "We are specifically focused on the middle market, writing $5 million to $25 million checks per opportunity," says Galusha. "The vehicle gives us the ability to acquire distressed debt, originate bridge loans and provide preferred equity 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 are definitely more focused on markets closer to home that don't require us getting on a plane," says Galusha. "But then again, we've always been bullish on Southern California. It's one of the best investment sale markets in the country, so there is a lot to do here in our own backyard. I think the only other change we made due to the pandemic is that we have pulled back on our last dollar exposure—we have gotten more conservative on that front."
While the pandemic hasn't changed the strategy, it has changed the demand. Rather than acquisition requests, Brasa is mostly seeing recapitalization requests. "The majority of capital requests relate to recapitalizing existing deals with gap equity to fund carry costs and anticipated capital expenditures," says Galusha. "Gap equity is necessary in this market given that it now takes more time to stabilize assets, it takes longer to lease up, and some loans are requiring paydowns to effectuate extensions. Some projects are not covering their debt service and Borrowers would rather raise preferred equity/mezz since our capital is typically cheaper than what existing investors would charge for more common equity. We also see increased demand for debt fund capital specifically in 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 firm 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 construct a portfolio diversified by asset type, geography and risk," says Galusha. "At the same time, we hope to raise a follow-on fund from both existing and new institutional investors."
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Kelsi Maree Borland
