Client’s Private Equity and Use of Carried Interest in Residential Property Purchase
The situation?
A UK-based City professional sought to purchase a residential property valued at £5,000,000 in Buckinghamshire. The property, spanning five acres with outbuildings and annexes, was an ideal upsize for the client’s family. The client aimed to borrow £3,750,000, representing 75% of the property’s Loan-to-Value (LTV) ratio.
The client, a UK national and a seasoned professional in the Private Equity sector, relied heavily on a compensation package comprising a basic salary, yearly cash bonus awards, and significant carried interest (often referred to as ‘carry’) from successful deal by deal pay-outs.
The primary challenge was the nature of the client’s income structure. Whilst the base salary and cash bonuses were straightforward, the carried interest, which formed the bulk of the client’s earnings, was less predictable. Consequently, most high-street banks would typically be ruled out for this type of deal should the carry element be required for affordability purposes.
Understanding the complexities of the client’s compensation, I prepared a comprehensive credit paper that detailed the client’s historical earnings and future vesting schedules. This paper highlighted the client’s strong financial profile, supported by evidence of successful deals and significant historic payouts. The document also included a detailed analysis of the client’s assets and liabilities, showcasing their overall financial stability.
I explored my network of lender contacts, engaging in detailed discussions to present a favourable view of my client’s profile. By leveraging personal relationships with lenders, I was able to negotiate terms that considered the carried interest payouts, which were critical to making the numbers work.
Where other banks had declined the deal, I remained persistent in finding a solution. My deep dive into the client’s financials and strong advocacy on their behalf were instrumental in securing a tailored financing option that met their needs.
The solution?
I successfully negotiated a blended product that combined a part fixed, part tracker (variable) rate. Specifically, I secured a five-year fixed-rate mortgage at just over 4% per annum on a full interest-only basis, with the remaining balance on a two-year tracker at slightly above the BoE base rate. The client anticipated a significant payout from an upcoming deal, so it was important to allow for flexibility in the loan structure. By assigning approximately 20% of the loan to the tracker rate, I provided the client with the option to overpay this tranche more aggressively upon deal closure (more so than the typical 10% allowance you get from most lenders), thereby reducing their loan exposure.
The solution not only met the client’s immediate needs but also enabled them to upsize their family home sooner than anticipated. The flexible loan structure aligned with the client’s income pattern, particularly the irregular but substantial payouts following deal completions. The interest-only basis helped with cash flow management, allowing the client to manage their finances effectively until the carried interest materialised.
This case exemplifies the importance of understanding the complexities of a client’s financial situation and the value of strong lender relationships. By delving into the details and leveraging personal connections, I was able to secure a bespoke solution that met the client’s needs and facilitated their desired property purchase, turning a challenging situation into a successful outcome.