In an ever-increasing digital age, a private equity professional is a prime example of a mortgage client that craves and often commands a bespoke underwriting approach.
A private equity professional is not your average mortgage client and if you have never met one, you may wonder why you should take the time to understand the often-complex nature of their income.
The number of such borrowers is small, yes, but deal sizes are usually high and, therefore, can be highly lucrative for mortgage advisers. So, if you’re based in London and the South East, or have clients who are based in the City, it may pay to become acquainted with what mortgage options there are for such high-net-worth (HNW) clients.
Private equity professionals comprise some of the brightest and best individuals the finance industry has to offer. They understand how to put money to work and generate impressive returns by investing in high-growth companies.
From an income perspective, they usually generate a mix of salary, bonuses and what’s referred to as ‘carried interest’, or carry for short, which is their share of the profits generated by their fund.
This fee varies from fund to fund, but is usually around 20% of the fund’s profits and is allocated once the returns are realised, which can be between four and seven years after the initial investment was made.
As their money tends to be tied-up in the ventures they are backing (their equity co-investment), they often prefer to borrow to fund the purchase of property, rather than liquidate their investments.
Annual salaries are often reasonably modest by banking standards, with the client’s carried interest overshadowing their basic wage — by what can be many thousands or potentially even millions of pounds. Herein lies the potential problem for a lot of lenders.
The challenge for lenders
When faced with several additional components to an income, it can become problematic for some lenders; especially for a lender which operates a tick-box approach to assessing affordability.
To add an additional challenge, private equity professionals usually require a large mortgage, often with a high LTV, due to their desire to minimise their outgoings and the amount of equity they need to commit to a mortgage.
Private banks like ourselves, however, have years of experience helping private equity professionals and are not dismayed by the complexity of their salaries and bonus structure — as some other lenders might be.
We were recently able to assist a private equity partner whose income was a mix of salary, bonus and carried interest, all paid in euros.
Our client had sold their current residence and was looking to purchase their next. They were in line to receive a large amount of carried interest in the coming months, which they were looking to set aside and draw upon when needed, potentially for a future tax bill or co-investment opportunity.
In this case, Investec was able to structure a mortgage in two parts. The first was a 15-year, interest-only revolving mortgage, which is a flexible facility secured against a client’s primary residence. Unlike a traditional mortgage, it provides freedom to access funds as and when required, up to an approved limit. Opting for a revolving mortgage allowed our client to draw up to the mortgage limit or pay down as often as they needed to. The second part was a five-year, fixed-rate mortgage for the remaining amount.
Our ability to take a holistic view of the client’s income meant we were able to meet their needs and incorporate their carried interest payments into their mortgage payment profile.
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