What Is JV Hybrid Equity?
As of this month (January 2025), Ben and I (Paul) have worked together for a decade. Over the years, we have developed four core company values. One value is “Shift the sails, but stay the course.”
This core value means we constantly examine the economic cycle, the commercial real estate market, investor needs, and deal flow to make adjustments to our business.
However, our end goal of bringing the best risk-adjusted investments possible to our investor base has never changed and will never change.
We’re excited to share the next evolution: JV Hybrid Equity. Please note that this is not an industry-standard term; we devised this term ourselves.
We believe this innovative structure combines the best features of preferred equity and common equity, providing both downside protection and uncapped upside potential. But before diving into why we think JV Hybrid Equity is such a game-changer, we’ll briefly review how we got here.
The Evolution of Our Investment Approach
When Wellings Capital began, the economic environment was quite different, and our focus was on common equity. Common equity offers the greatest upside potential, allowing investors to fully benefit from a property’s appreciation. However, this structure also carries the highest risk, as common equity investors are the last to be paid in the event of poor performance.
We created this graphic below to show how higher risk leads to higher potential returns. Please note that there is a widening range of potential outcomes as risk increases.
As the investment landscape evolved, so did our approach. During the recent period of economic uncertainty, we briefly turned to debt. Debt provided predictable cash flow and much lower risk but came with a capped upside. It was a safe haven but lacked the potential for significant returns.
Recognizing the need for a safer investment with higher returns than debt, we introduced preferred equity. Preferred equity struck a balance, offering a blend of relatively high capped returns with relatively low risk. It allowed investors to potentially enjoy steady returns with common equity providing a first-loss position buffer.
Preferred equity has performed exceptionally well during recent market volatility, and it’s a strategy we continue to embrace today.
We always knew the preferred equity market would shift and that we would need to pivot eventually. We spent months analyzing the market and brainstorming a solution that would account for lower interest rates and a loosening debt market while still allowing us to access a broader array of high-quality sponsors and deals. Something that could combine the downside protection of preferred equity with common equity’s unlimited upside. Enter JV Hybrid Equity.
What is JV Hybrid Equity?
JV Hybrid Equity is an innovative structure that marries the best features of preferred equity and common equity, offering investors both a safeguard against potential losses and the opportunity for uncapped returns.
Unlike traditional equity structures, we designed it to combine the downside protection of preferred equity—which may mitigate the risk of losing money—with the unlimited upside of common equity, allowing investors to benefit from the property’s appreciation.
Downside Protection: Like preferred equity, JV Hybrid Equity offers investors a level of downside protection. It’s designed to ensure that the risk of losing capital is mitigated.
Unlimited Upside: Unlike preferred equity, which has a capped return, JV Hybrid Equity allows investors to benefit from unlimited upside like common equity investors.
This structure represents the culmination of years of experience and a relentless focus on value investing. It offers investors the best of both worlds: robust risk management and the opportunity for potentially outsized returns.
To see what JV Hybrid Equity looks like in a real deal, you can review this webinar: https://www.wellingscapital.com/texas-multifamily-sidecar-january-2025
Why JV Hybrid Equity Matters
Here are a few reasons we like JV Hybrid Equity so much:
Protects the Downside: JV Hybrid Equity provides investors with a return of capital priority over common equity (similar to preferred equity). This is a significant benefit for investors if a property sells at a loss.
Access Unlimited Upside: We secure uncapped upside potential alongside common equity investors (unlike preferred equity). This is a significant advantage, allowing our investors to benefit from a property that performs well. We really get the best of both worlds.
Decision Rights and Controls: With JV Hybrid Equity, we have major decision rights on sales and refinances (for example), we control budgets, and we can even force a sale to recover our capital if the property’s performance is trending in the wrong direction. While we invest exclusively with experienced operators whom we trust implicitly, this added layer of oversight provides an extra level of security for our investors.
Access Quality Operators and Deals: This structure does not require a current pay like preferred equity. Some operators view preferred equity as additional leverage. As such, we expect to access additional sponsors and deals that aren’t open to the preferred equity structure we’ve offered these past few years.
Adding to the Repertoire
It’s important to note that the introduction of JV Hybrid Equity doesn’t mean we’re abandoning common equity or preferred equity investments. Both structures remain integral parts of our investment strategy going forward. Common equity continues to offer the highest upside potential for more risk, while preferred equity provides a more stable option with consistent returns.
JV Hybrid Equity is simply the next evolution—an addition to our toolbox that allows us to achieve even higher potential returns for each unit of risk. By combining the strengths of both common equity and preferred equity, it fills a unique niche in our portfolio.
The Bottom Line
Our JV Hybrid Equity structure comes from years of refinement, innovation, and dedication to value investing principles. It combines the best features of preferred equity and common equity to deliver a truly unique investment opportunity. With downside protection, unlimited upside potential, and the added security of Wellings Capital’s rigorous due diligence and negotiating power, it represents the next step in our mission to deliver superior risk-adjusted returns to our investors.
If you have any questions, please contact us or use this link to schedule a call with us.
DISCLAIMER: This article is for educational purposes only and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision. Information and any opinions contained in this article have been obtained from sources that we consider reliable, but we do not represent that such information and opinions are accurate or complete and thus should not be relied upon as such.
Wellings Capital Management, LLC is an Investment Adviser registered with the SEC. All investments pose risk, including the possible loss of all principal invested. Past performance is no guarantee of future results. There is no guarantee that any projected results will be achieved. Investors should consider the investment objectives, risks, charges, and expenses of any Welling Capital investment vehicle before investing. For a Private Placement Memorandum (“PPM”) with this and other information, please call 800-844-2188 or email invest@wellingscapital.com. Please read the PPM carefully before investing. We do not provide tax, accounting, or legal advice, and all investors are advised to consult with their tax, accounting, or legal advisers before investing.
