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The Rise of Private Equity in EB-5 Project Capital Stacks

Since the 2008 financial crisis, EB-5 investment has enjoyed a prominent place in the capital stacks of some of the country’s largest and most prestigious developments. However, for the first half of this decade, EB-5 investment and traditional private equity rarely came together to fund the same project.

This appears to be changing, according to recent NES Financial project data, which suggests an emerging trend of as much as 26% of project capital now drawing from private equity funds. Of course, this apparent convergence of EB-5 and private equity raises a number of questions, among them: Why the shift? And is this good or bad for the EB-5 industry?

 One likely driver of this trend is banks’ tightening of construction loan standards since the financial crisis (and particularly in light of the most recent Basel regulatory standards), which has led to decreased lending and created a vacuum which developers have been eager to fill.

Developers’ reluctance to make up the capital deficit with more of their own money is understandable. But why not simply increase the EB-5 share? After all, in years past, it was commonplace for EB-5 funding to make up 70% or more of a project’s total capital. But following ever-increasing attention to due diligence measures by EB-5 investors, the demand for a large “job cushion” — a project’s estimated job creation above and beyond the legal minimum required to validate an EB-5 petition — has become a major consideration. Since increased EB-5 capital would attach further job-creation requirements, reducing the project’s job cushion, developers have looked to private equity to bridge the gap.

Another explanation for the shift is a simple one: global investment in U.S. real estate is booming, and private equity firms know they can capitalize on this by competing directly for foreign investors.

So, is this a good thing for the EB-5 industry? Almost certainly yes. However, that isn’t to say there won’t be hurdles to overcome.

With this influx of private equity, EB-5 projects stand to benefit from the increased security, transparency, and institutional rigor to which the private equity market is already accustomed. But they will also need to be structured differently — to be built on new operational and compliance platforms, and to appeal to a class of investor who expects higher levels of servicing, reporting, and transparency.

And regional centers, in return, may begin to evolve into “one-stop shops” for immigrant investors who, their due diligence already satisfied during the EB-5 process, may look to move more wealth into the United States by way of a private equity investment in the same project.

Put simply: though regional centers will undoubtedly face new challenges as the market adapts, they may gain a competitive edge if they get out early ahead of the trend.

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