Factors influencing investor preference:

1. Relevant experience – demonstrating a track record of successfully delivering similar schemes provides investors with confidence. A significant leap from the scale of projects previously completed may raise concerns.
2. Shorter loan term – investors prefer shorter build and sale periods, typically 18-24 months, thus allowing for a quicker exit and returns.
3. Skin in the game – investors typically look for developers to have a financial stake in the project of up to 20% of the equity shortfall after debt funding.
4. Competitive debt – the quality of lender and competitiveness of debt finance from the senior lenders will influence investors’ interest in a scheme.
5. Low-middle market GDVs – investors favour projects with low-middle market GDVs; this is because these markets have a higher volume of demand in comparison to high GDV units, facilitating easier unit sales and reducing risk.
6. Diversification – projects with multiple units spreads risk, making them more attractive to investors. Minimum requirements typically range between three and five units.
7. Profitability/return on investment – investors prioritise schemes with attractive profitability metrics, achieving their minimum IRR and EM return multiples, often seeking 20%-30% profit on cost post-finance.

Each investor will have their own criteria when determining feasibility of supporting a scheme.

•   Equity Masterclass: internal rate of return vs equity multiple
•   Equity Masterclass: Equity investment at the corporate level (multiple schemes)
•   Equity Masterclass: Structuring the capital stack, SPVs and shareholder agreements

Using brokers to source equity funding:

Brokers can play a pivotal role in facilitating equity funding for developers, offering invaluable benefits such as:

1. Access to exclusive relationships: brokers have relationships with HNW family offices and alternate funding sources that developers would not have otherwise have access to, broadening the pool of potential investors.
2. Navigating a competitive market: in today’s market, where borrower equity is scarce, brokers serve as intermediaries, receiving and providing investors with multiple investment opportunities. Leveraging warm relationships makes for a more effective approach as opposed to developers approaching investors for funding on a cold basis. 
4. Pairing the right funding parties: with an understanding of which equity investors and lenders will work together, brokers can structure the capital stack with parties who have established intercreditor relationships. This ensures smooth coordination, potentially saving the requirement to revisit the market for senior debt if an investor is not willing to sit behind a specific lender in the waterfall structure.
4. Tailored investor matching: brokers understand investor criteria and appetite, therefore they know which investors might support a scheme. They also tailor investment decks around investor appetite, to ensure that the proposal is put forward highlighting an investor’s key drivers.

Other considerations in raising equity funding

While equity investment can provide an excellent opportunity to raise maximum leverage funding, developers should consider the following to key points:

• Increased developer contribution: the more capital input by a developer, the more attractive an opportunity is to funders. The greater their ‘skin in the game’, the greater the number of equity investors that become available to support a scheme.
• Mezzanine financing: mezzanine funding is accessible to developers that can input 10% of total costs, thus providing access to additional funders. This is less expensive, and a profit share is not required, but instead includes higher interest rates than senior debt where the lender takes a second charge as security.
• JV Partnerships: collaborating with vendors in JV partnerships allows developers to leverage a site as borrower equity. However, some lenders may still require developers to contribute their own capital.
   

Final thoughts

The increase in equity investment funding enquiries Arc & Co. is receiving from developers emphasises the lack of borrower liquidity within the current market and the importance of this method of raising funding.

While equity can seem costly, where developers must share their hard-earned profits, it should not be disregarded.

This method of funding can empower developers to take on new schemes while investing less of their own capital into each, enhancing their growth and diversifying their portfolio.

Understanding the intricacies of equity investment, the structure of these facilities, schemes which are attractive to investors, as well as having strong relationships with investors are essential in helping developer secure this type of funding.

These elements form the bedrock for successfully raising equity in today's dynamic market landscape.