Next Level 261: Why Sophisticated Investors are Turning to Private Credit with Ellis Hammond

Bank like risk, equity like returns. And that really is bank like risk.

With equity like returns. Welcome to the Next Level Income show. It's our goal to take your income, your investments and your life to the next level. I'm your host, Chris Larsen. If you haven't yet, get a copy of our book for free at our website, nextlevelincome.com. that's www.nextlevelincome.com. just click on the book link and I'll even send you a copy if you put your address in. On today's podcast, I'm happy to welcome my friend, Ellis Hammond. Ellis and I are going to talk about a topic that's very popular today. We're talking about private credit. Ellis is the Vice president at Aspen Funds, which is an alternative investment firm managing over 600 million in assets across private credit real estate as well as energy. In his role, Ellis leads investor relations and capital strategy, helping accredited investors across institutional caliber opportunities designed to generate consistent cash flow and long term wealth. With a background that bridges entrepreneurship and capital markets elsewhere, Ellis is passionate about equipping high net worth individuals with strategies to diversify beyond Wall street and invest with greater clarity and confidence. He's a frequent speaker and commentator on topics including the rise of private credit, macro Driven investing, one of my favorites, and the evolution of alternative assets, also one of our favorites. Here at Next Level Income. Ellis is known for his ability to translate complex investment themes into clear, actionable insights for investors seeking both stability and performance in today's uncertain economy. And today we're going to talk about fundamentals in the market where we are today, why private credit is actually a great opportunity for investors. Ellis, great to see you. Welcome to the show.

Chris, so pumped to be here, man.

Thanks for having me on, dude. Six years and that we've known each other as friends and professionally and this is the first time you're on the podcast. I can't believe it. So I'm so excited to have you here. We're going to be talking about a topic that's been very popular in investment circles these days, private credit. But I would love for you to share with the audience a little bit about yourself and your background since we've known each other for a long time. But the audience is just getting to know you.

Yeah, so I've been actually started my career in full time vocational ministry, which is, I thought I'd do that my whole life. But we really, you know, kind of grew a passion to want to help other people financially, not just spiritually. And so that Kind of led us on a journey into real estate investing. Long story short, and we bought a duplex and then we bought an apartment building and you know, and then we started really growing our company. And over those years we've acquired, you know, a multifamily portfolio, but also really grew, you know, a skill and a passion for raising money and helping investors, you know, really, you know, go outside of, of Wall street and really look into alternatives. And so that led me to today I serve as the vice president of Aspen Funds, which is a, you know, we're a 12 plus year alternative private alternative investment company. We serve about 150 accredited investors. And what's cool about acid and Aspen, the reason I, you know, ended up kind of joining forces with Aspen is they've done and what we've built built is a macroeconomic approach, right? Where instead of just saying, hey, we're going to be the multi family guys or we're going to be the self storage guys or you know, whatever it is, we're much more nimble, we're much more flexible. And so we say, hey, what's happening from a 10, 20 year curve, right? When we look at the macro trends and we say what is happening? Because Roddy is like, and you could see this in the multifamily space, it's so much easier to make money when what the tide is going up or down, right?

Absolutely right.

You want to swimming with like with the tide, you want to be going with the tie when it's going up and when it's going down. Not to say you can't make money, but we've seen that it sure is a heck of a lot harder to make money when the tide is going up versus when the tide is going down. And so we just, it makes sense. We just want to go with the tide. And so we want to find things that are going up and be part of those. And so we, that's what our experts in is trying to identify those, those trends, create a strategy that takes advantage of that trend and then put best in class teams together. And so they were really in probably three verticals. What we're going to talk about today, which I'm excited about, is private credit. We're oil and gas as well, and then industrial development here, mainly here in the Midwest, which is where we're based at in Kansas City. So that's what we do, man. So I get to kind of grow and develop our investors and our investor community and really excited about the topic that we're going to dive in Today because I think it's really, really compelling moment for private credit.

Absolutely. And I'll never forget the first time I heard Bob Frazier, your founder, speak a couple of years ago, and I was like, wow, this guy, he thinks the same way I do. We've talked about demographics and the reason I got into the medical device space here on the show, ultimately multifamily on the show. And I love that you guys have that as the foundation of your group because I agree wholeheartedly. You know, if you can see where the trends are going, the macro trends are going, then like you said, we can swim ultimately with the tide. So for those that are listening that aren't familiar with what private credit is, I think we all know what credit is. You know, people have a credit card, you go to the bank, you get a line of credit, you get a mortgage, you know, on your house. You know, we're really talking about credit in the commercial space, Ellis. So break down for us the difference between, you know, like senior debt, private credit, equity, like where, what, what are all those levels in terms of what a, what a capital stack is for a piece of property or an asset? And then we'll dive a little bit deeper into, into private credit.

Yeah. So like a broad definition of private credit would be, you know, non bank lending. Right. Just think like that's pretty much what private credit is. It's, it's non traditional lending where there are funds and you know, typically private capital. So think retail from a retail investor, which is, you know, Target on to or blackrock, where they're getting money from insurance companies and pension funds and. Right. Where they're pooling. But again, all of that is non. That's not bonds, right? That's.

Right.

That's private. That's bigger pools of private individual money essentially is what it is. Right.

So if I, and I mean, for instance, you know, and we have investors that, that are listening here that do. If, if you're, if you're buying a single family house and you say, hey Chris, I'm going to flip this house, can I borrow money from you? And I, I lend you say $200,000 to, to flip that house. That's, that's an example of private credit. Right?

Yeah. At a very small scale, for sure. I mean, yeah, you could think of private credit as debt, but it's, it's broader than that in some ways. So, you know, private credit, and I mean just for context, like this is a massive, massive asset class. Blackrock is a big player. I mean, there's A lot of these institutionals, but they, I mean they've, you know, I can read you news. They just acquired back into a 12 billion dollar merger and acquisition. I think that's, that was their third major acquisition in 24. You know, so we're, we're talking about an asset class and private credit that by 2030, by the time 2030 rolls around, this will be somewhere between 3 and 4 trillion dollars in terms of size. So this is a, so when we think private credit like this is big. So what that is typically is senior debt. It could be mez debt, it could be pref equity. So it doesn't just have to be debt. Like we have a mix of all three of those in our fund. And this is, can be, you know, loans to businesses which typically what you're seeing kind of these larger institutions do, you know, bigger opportunity to deploy capital into, into businesses. Our fund is primarily focused on real estate. So we're 100% real estate backed inside of our private credit fund. And so that's really what it is. It's non traditional financing, you know and typically these companies or these real estate sponsors are coming private credit lenders because, and we can talk about this because of the strength, the more stringent requirements, the strain on the banks, they're unable to get enough financing to actually make their deals work. And that doesn't necessarily mean the deals are inherently bad, doesn't mean they're distressed. These could be great assets, great businesses, great opportunities. They're just unable to go get the financing they were in a previous period, which is why this asset class has grown so rapidly.

Yeah, so let's talk about that and some of the, some of the regulations as well as some of the shifts in the market. But just to recap so you know, if you're buying a property typically of the senior debt which is going to be first in line, the mez or mezzanine debt is going to be behind that, kind of like a home equity line of credit for, for those that, that may have that on their primary residence. Then you have what's called preferred equity, which some people may be maybe familiar with, but that's going to come next in the capital stack and then you're going to have the common equity above that. Is that right?

Yeah. Do you have a YouTube? Is this on YouTube?

Yeah, yeah. So if people are watching. Yeah.

If you want to share, I'm going to just get it real quick that way I'm going to kind of, you know, give you a little, you know, go to go to Chris's YouTube channel so you can see this because I think it's so. It's perfect.

That's beautiful. Yeah.

And, and we can talk about why this is so important because I think a lot of people think, oh, I'm a. I'm. I'm invested in multifamily. I'm invested in bonds and Treasuries, I'm invested in mobile home parks, I'm invested in whatever it is. So I'm diversified. Right. That's how I think. Especially as you. If you're new to LP investing, you're new to passive investing. You think, I'm diversified across regions, I'm diversified across asset classes. In realizing that your diversity, your diversification is only at the surface level because you've not yet diversified, yet is across the capital stack.

That's a good point. So you're diversified basically horizontally, but not vertically in terms of.

Exactly. You haven't gone. You haven't gone deep in the capital stack because if you think about it, you know, is the bank is taking the less the risk in the transaction right there, the senior debt, the LP investor, who's the common equity, which if you're looking on the screen, is the common equity up here. Now also they're taking less risk, but also what are they getting the lowest yield. Right. So the lower you go in the capital stack, the less risk you take, but the lower yield you take. Common equity, the lp, which is why it's the most expensive money is the last to get paid, but if they do get paid, they're the highest return in capital. And so prep equity is somewhere in the middle, right? Yeah, it could be senior, it could be mez, which is essentially just think of like you said, line of credit or second loan than pref equity, which is equity in the deal, but it gets paid before the common equity and typically in our deals has some type of negotiated takeover rights or management control rights if the borrower defaults.

Yeah. So what you're doing is you're finding what I would call the sweet spot in the capital stack on each deal and then you're also utilizing some of those rights to be able to decrease your risk even further. Further in that. And you know, for, for those that are like I talked way back in episode 100 on the show, so you can go ahead and check out that podcast, episode 100, where I talk about the 18 and a half year real real estate cycle and where we are in that second half of the real estate cycle. It pays to be the bank. Banks become more profitable as rates go up. So I was talking about that. What are we on? We're in like episode 261, I think you are, Alice. Maybe 262. So 160 episodes ago, we're, I was talking about this. And as rates have increased, it's become more advantageous. There's a bigger return in terms of being lower down in that capital stack. So you can actually reduce risk. But also returns have gone up over the past three to five years since rates were bottomed out back in 2021. 2022.

Right.

Yeah. So let's talk about the fundamentals in the market, Alice, because you, from my perspective, really the fundamentals haven't changed in terms of a lot of the commercial real estate assets out there. You know, we, we've seen some extra supply come on the past couple years in the multifamily market, but we're still way under built. You know, coming out of the Great Recession, we're still way under built. That's why affordability is such a big problem because we just don't have enough supply. There's a lot of cities like here in Asheville, where I live that are, that are facing these issues. Dive a little bit into the fundamentals of the market and what types of, of assets that you all focus on participating in.

Yeah, really great question. I'm going to pull up some things here so I can kind of walk through this. So there's. Yeah, to answer your question directly, we're, we're focused on mainly real estate assets. Right. So that can be in, in our portfolio today there are about 10, I think we have, yeah, there's about 10 to a dozen properties in that, that's a mix of medical, office, multi family, a lot of multi family, a lot of retail. There's I think a development deal in there. We don't do a lot of development because it's mainly a cash flow fund, but there's a little bit when the opportunity is right. And so it's, it's a, it's a, you know, kind of your main food groups. Right. When you think about real estate is, is really what we're lending to. But you know, what typically these placements might look like and I can give you several examples is.

Yeah, let's walk through an example.

Yeah, let me pull, let me pull one up here because I think this is, this is really helpful for, for your audience. Understand. So this is a gap running opportunity. This was a, a 94 unit multi family property. This was a new purchase and so I think it's also really important, Chris. And we just came out with a podcast by the time your audience is listening to this called when, when to run away. Like deals you shouldn't do run away. Please, please, please don't misunderstand me. There are a lot of sponsors out there who are raising pref equity or I don't even know if I don't private credit. But preferred equity opportunities on deals that they've done that are currently underwater to try and get them out of the hole. Right. Or doing the distressed lending. That is not what this is. So we are typically buying almost always kind of new acquisitions. And so this deal for example was a 94 multifamily deal was a new purchase. It was equity to close the deal. The amount, this was actually pretty small. This was a half a million dollar loan. We're in a second lien position, meaning we were able to place a lien on the property and our combined LTV. And this is what's so significant. Our combined LTV was 75%. Right. So that means with the senior and our equity we're at 75% meaning there's a 25,5% equity cushion ahead of us. Right. In case the deal were to, to go south. And then on this one for example we, we chart there's a 12 and a half interest rate plus points on the back end. That was a short term loan. That is actually pretty rare. That was a short one. I'm just kind of going through. But other ones, you know, we were, you know, give you example. This is a 24 month term, a million and a half loan on this. We were actually the senior position in this one and our LTV's 4% on that deal. I'm sorry, say it again. It was what, say, say one more time.

The, the LTV was what on that.

37 is what we went up to on that one. But again he like here, here's a, here's a better example because here's a prep equity which is a lot of what this fund is $1 million placement. Combined LTV is 55%. And then how we structure these so people know is we charge an 8% on our money on that deal, but then we have 6% accrued because these deals can't afford a 14%, you know, yield on top of the current pay on top of the debt. So then what we do is we charge 8% on today and then we accrue in most cases compounding another six with a, with some type of origination fee. And exit fee. And so that allows us to have yield today with upside tomorrow. And, and again, the combined of that, of that prep equity placement was 55%, meaning with the debt and our equity, we're. We're at 50. We're 55% levered in this deal, including our capital. Right. So there's a lot of great cushion. And so for investors, thinking, man, why should, you know, I consider private credit? Well, let me ask you this question, and this is, this is. You actually answer this yes or no because this, most investors are fine to do this. Would you rather take 12% today with 40% equity cushion ahead of you? Right. Meaning it's a pretty good, you know, pretty low risk deal. Not to say there's not risk because there is debt involved, but you're making 12% today with a major equity cushion in front of you in case something were to go south, you could at least get your money out. Would you rather have, let's say, 17, 18%, but be the last in the deal? You're fully levered. You're 100% levered in a sense. Right. Because you're, you're the common equity and make the trade for an additional 500 basis points or 5 percentage points. I'm not here to say which one is better or worse because we're also doing multifamily deals and stuff where people want to come do that. What I'm saying is that I think most people say, especially sophisticated investors, or maybe those who are saying, I don't necessarily want to risk or have money at risk, I'm okay to take the 12 versus the 18 because I can count on it, I know it's coming. And I'll take 12 today versus 18 five years from now.

And I think, especially for those. Yeah, and especially for those investors that, you know, have a lot of that equity in their portfolio currently. And I think, you know, if we, if we rewind a few years and we were seeing 20, 30% returns in the equity space and the pref equity or, you know, some of these lower positions, we're getting say 8 to 10%. That's a big spread. But today we're seeing returns come back to normal. You know, you're seeing 15 to 20% equity returns, you know, versus say 10, 12% in the private credit space. So the spreads have narrowed significantly.

That's a, and that's a really good point. Right. You're not seeing, you're, you would not see a multifamily sponsor right now come out and say, 25 to 30% higher are. Right. Like it's not possible in a sense. Right. There's just not enough spread there from where they can get their stabilized yield at, you know, to where they're entering at today on acquisition. And so yeah, the, the, the spread of a common equity investor versus a prep equity investor is a lot more narrow. And it's, you really have to be confident to say or just have a longer time cycle, you know, a longer time horizon to say I'm okay to, to trade that today.

Yeah, no, I, I, I understand that wholeheartedly. Hopefully we've articulated that for you that are listening here today. So let's talk about why. So we've kind of talked about where it fits in the financial spectrum and the capital stack here, Ellis, but let's talk about kind of what led up to this. So we were talking, you kind of overviewed some of the regulations. We touched on that very briefly. But let's talk about why banks are, aren't lending 75, 80% like they were, you know, they're lending. We're seeing a lot of cases, you know, 50, maybe 60% that banks are willing to lend on a property now. And that makes it really challenging, you know, to make the numbers work. That's one of the other reasons returns have come down. You can't, you know, price of properties are higher. So again, let's, let's acknowledge that fundamentally, you know, the market, the market's solid from a demand perspective, but prices are higher, rates are higher and loan to values are lower. And all three of those work against, you know, the returns that come in these multifamily deals, which is why you're not seeing, you know, as high of return. But why are banks not lending as much today as they were before?

Let me just give you this number. I'm reading it. Roughly 950 billion of US commercial real estate mortgages were estimated to mature in 2024. That grew to almost a trillion in 2025. And in 2026 it's estimated to be over almost $1.2 trillion. I think that number's actually grown. I think I'm looking at an old chart here. I think it's close to 1.5 now of trillion dollars of commercial real estate mortgages maturing. Okay. So maturing that most are underwater, by the way. So, so they're not going to be able to, you know, pay off. Right. And so you think about from a, from a bank, like what does that, like naturally they just, credit tightens. Right. So because a lot of These large maturing loans are hitting cash flow covenants. This is going to, this reduces banks appetite to go, you know, to, to.

Extend more because banks want to see a percentage of cash flow that can cover their loan. So for instance, if you need a million dollars to cover a loan payment, banks are going to want to see typically 1.25 million or higher in terms of, of cash flow to do that. So they won't, they're not necessarily looking to lend on the amount of the property, they're looking to lend on the amount of the cash flow versus the debt service. Is that accurate?

Yeah. And think about it from a fundamental standpoint. If they've got a bunch of money out there that hasn't been paid back to them, one and a half trillion, multiple trillions of dollars. Right. Like that hasn't been paid back to them. This is like you, like you lend money out. Okay. You less money to lend out. Right. So if that money's not being paid back to you.

Yeah, yeah, there's nothing. Yeah. It's not coming through a cycle. So you know, if you're an investor and you say, hey, I'm going to reinvest this money when the deal pays off. But you know, instead of two or three years, the, the deal that's being, it's being held for five to seven years. The banks are in the same position. They've got to wait for that money to come back in. When they got a bunch of money being paid off the banks to get it right back out there. But in this case they don't have the capital in their accounts to go do that.

Yeah. And then you have something like, and then there are actual regulations like the Basel 3 Accord, which means, you know.

This is, let's talk about that. Dive into that a little bit. I think a lot of investors probably this may be the first time they're hearing about this.

Yeah. So this was introduced in response to, you know, 0809 global financial crisis and it requires banks to have higher capital requirements, you know, restricts like their leverage ratio. Like there's actual things that they have to follow in terms of higher capital requirements. I'm just reading some of the things, leverage ratio, liquidity requirements as you talked about, you know, a capital buffer on different things. And so all of these things adding together. It's not that there's kind of one thing that's like, okay, all of a sudden banks aren't lending anymore. This is the, the, the compounding effect of the last really 15 years might say of what I would say has created the private credit moment, right, where you've had, you know, bridge lenders overextending themselves, you have, you know, stricter financial regulations. And so banks pulling back because of, because of this, which has now kind of created this massive opportunity which we're seeing in the market right now for the private equity groups, retail investors, you know, more, you know, from institutions to retail investors, being able to take advantage of this is where there's a, you know, that is capitalism. Right. Where there's an opportunity we can step in. And that's exactly what this kind of moment is created. And in so much money being, you know, pouring into this space because the fundamentals in a lot of places are still there. Businesses are still growing, Real estate is, you know, growing. People still need a place to live or a place to take their kids to the hospital or, you know, whatever it might be. And so it's not like the, in a sense, the asset class or the fundamental. The asset classes have gone away. It's that they can get financing for them.

Yeah. So the way I like to look at it is that, you know, where we are in the real estate cycle is as interest rates have gone up. I like to say be the bank. Like during this part of the real estate cycle, be the bank you guys like to see. You guys like to say the lender always wins. Right. So it's like, be the lender, be the bank. As you do this. The new regulations that have come into play over the last 15 years have restricted what banks can do and the amount that can go in. The market dynamics in general have restricted the amount of capital that banks have coming in. And this presents, as you said, the private credit moment where we as investors can potentially step in and fill that gap and take advantage of this opportunity that's coming through.

Yeah, that's exactly right. What we like to say is bank like risk, equity like returns. And that really is bank like risk.

With equity like returns. I love that.

It's exactly what private credit is offering investors right now, which is why so many people are moving, you know, a portion of their portfolio into this. Because, well, of course, like, if I can make equity like returns and take bank like risk, feels like a pretty good trade off. Right. And so, absolutely, that, that's why we're really bullish and starting to see a lot more people move. Move to this.

Yeah, no, it's, it's great. And again, you know, I've, I've known, I've known you for, for many years and known Ben And Bob, at Aspen Funds over there, over there for, for several years now. And I really like the approach that you guys are taking if people want to learn more about Aspen funds. Ellis, what's the best way to find out about, about you guys?

Well, yeah, I mean, I just want to highlight you and what, you know, what you're. I'm excited that we're going to be working together and I know that you're really bullish on the space and cop four, you know, finding great opportunities. So I'd say if they're interested in this, you know, I know that we're going to be working on something together. And so, you know, definitely check what you're doing because I think we're going to create a lot of momentum and a lot of, a lot of advantageous opportunities for investors. But in general, you can read, you can go to our website, Aspen Fund Us. And again, we have kind of a buffet in a sense of offerings depending on what your investment goals are rather that be growth or tax, you know, tax advantages or cash flow. You know, we try and kind of position ourselves to have something for each of those investors or maybe the investor looking to do all three. And so Aspen Funds us or just my email list at aspenfunds us. Be happy to talk directly with anyone that has more questions about what we talked about today.

Excellent. Well, yeah, we're super excited to be partnering with you guys. We've been working on this for quite a while now. We'll have some more information in the link here down below in this video or if you're listening on Spotify or podcast, you can click on the link below or just go to next levelincome.com or email me Chris nextlevelincome.com Chris nextlevelincome.com and say I want to learn more about private credit. And and we'll fill you in. Ellis, great to see you as always, my friend. And thanks for sharing more about the private credit space and where we are with your audience.

Thanks, Chris. Enjoyed it, man.

Hey Chris, here again. I hope you found this episode valuable. Now I have one more thing to give to you. We have a page for my coaching clients where you can get a free copy of my book as well as much more from previous guests on the show. Just check out nextlevelincome.com coaching to get a free copy of my book, audiobook and much more. I'll send you a copy of my book and cover all the shipping costs as a thank you for listening to the podcast. Also, please like share and take just 90 seconds to give us a rating on Apple podcasts.