Syndicated vs bilateral loans: what are the advantages for debt funds?

Today, to finance real estate professionals, asset management companies can implement an investment strategy that combines the acquisition of syndicated loans with the origination of bilateral credit facilities. But what benefits does this dual approach offer investors in these funds?

Real estate financing has been accessible to debt funds for around 12 years. Initially, their involvement was limited to acquiring loans on the syndicated market. However, since 2018 and the implementation of the Sapin II law, French-regulated funds have been authorised to originate financing directly – whether for property acquisition (loans) or for renovation works (committed credit facilities). Asset managers can now deploy strategies that combine both approaches. What benefits does this dual approach offer investors in these funds? Christophe Murciani, Head of Real Estate Private Debt at LBP AM, sheds light on the deployment, yield and dynamic risk management benefits from the investor’s perspective.

The syndicated loan market is particularly well-suited to rapid deployment. This is primarily because the loan already exists. First, one or more banks have arranged and disbursed the credit, and the fund’s role is simply to select the loans it wishes to acquire from a broad pipeline – especially broad if it spans several jurisdictions – and to submit the proposal to its investment committee for approval.

Second, because the legal documentation with the borrower is already in place. A simple transfer agreement with the selling bank formalises the investment. Even in the event of oversubscription, where the fund’s allocation may be reduced, the transaction still results in effective deployment By contrast, bilateral lending involves significantly higher execution risk and slower deployment. First, the fund must establish itself as a recognised lender in the market, communicate its financing strategy and reassure counterparties about its decision-making process and reliability in disbursing funds on schedule – an advantage that banks enjoy by default due to their long-standing presence.

Moreover, borrowers are often themselves in competition with other investors to acquire assets. The fund thus faces double uncertainty: will the borrower win the bid and, if so, will it choose the fund as its lender?

Once these uncertainties have been resolved, legal documentation can be drafted and due diligence carried out on the asset and borrower.
Overall, bilateral origination is a more uncertain process, and even when successful, is time-consuming.
​​​​​​​Remaining active in the syndicated market provides asset managers with a continuous view of market conditions, enabling them to adjust their risk/return requirements accordingly.

To stand out as bilateral lenders, asset managers implement differentiated strategies – for example, by targeting mid-sized transactions that are too large for regional banks, but too small to attract major financing institutions for syndication.
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By operating in this less competitive space, funds can achieve higher initial returns. Experience shows that the margin differential can reach 40 to 50 basis points annually. Additionally, by arranging the deals themselves, funds can capture significantly higher upfront fees – typically three to five times more than in syndicated transactions.

Dynamic risk management

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Once the investment is made, project monitoring becomes essential. As real estate loans are usually non-recourse to the sponsor, the documentation includes financial covenants to track risk, along with numerous corrective measures such as reallocation of rental income, margin adjustments or changes to the principal repayment schedule. Supervision is also required for heavy renovation projects, including oversight of the project management assistant (PMA), which supports the lender in monitoring the construction and validating drawdowns.

• In syndicated deals, the credit agent handles administrative and informational duties, such as calculating cash flows, issuing interest and principal payment notices, allocating the amounts among the various lenders and ensuring timely borrower disclosures.
  
•  In bilateral loans, the asset manager directly oversees this. The proximity created during structuring facilitates smoother communication with the borrower, with no information loss or delays. The asset manager can respond more swiftly, especially as the decision of a single lender – the fund – is sufficient.
  

By contrast, when decisions must be made within a group of lenders, the process is slower. Coordinating schedules, differing assessments and internal review timelines at each lender all mean that resolving the difficulties encountered by the project takes time. Recent experience, especially since the decline in asset values in late 2022, also shows that different lender types behave differently.

•  Banks – whose end client is the borrower – maintain a broader business relationship that goes beyond the specific financing and must be preserved. 
  
•  Debt funds – whose end client is the investor – focus on delivering optimal returns.
  

While both categories, generally represented by professionals experienced in real estate financing, may agree on the risk diagnosis, divergences emerge when it comes to compensating for the additional risk resulting from changes to the original agreement. In a bilateral loan, negotiation with the borrower is more direct and most often results in enhanced yields. This is where dynamic risk management meets the pursuit of optimal returns.

These two types of lending offer different benefits to investors in debt funds. As these approaches are not mutually exclusive, asset managers can design investment strategies that leverage the strengths of each, balancing yield and risk control on the one hand, and deployment speed and market insight on the other. Finally, in a rapidly evolving ESG landscape, bilateral loans enable funds to define their own KPIs and structure incentives, such as margin adjustments, based on the borrower’s progress in reducing the environmental impact of buildings.