In general terms, the capital markets are any place where securities can be purchased and sold. In most cases, these securities are debt and equity. In the real estate world, there are private debt, private equity, public debt and public equity options in the capital markets. Some such “markets” occur on exchanges such as the NASDAQ, NYSE or OTC. Thanks to the private markets brought to us by Regulation D and the JOBS Act, many more private markets are available for real estate investing. Debt and equity crowdfunding portals, particularly those that work with Regulation D 506(c) have facilitated a large number of private capital formation deals in the real estate markets.
The capital markets help facilitate the transfer of cash flows between buyers and sellers and suppliers and users of capital. Individual retail investors, large institutional players, governments, businesses and other entities all participate in this “market.” Capital markets are necessary for the proper functioning of a capital economy as they facilitate and generate economic output. The capital markets consist of primary markets, where securities (e.g. debt and equity) are sold for the first time or secondary markets, where investors trade existing securities with other investors.
Here is a more granular breakdown of the four areas of finance in real estate: public equity, private equity, private debt and public debt.
Public Debt & Public Equity
- Commercial Mortgage Backed Securities (CMBS)
- Real Estate Investment Trusts (REITs)
- Collateralized Debt Obligations (CDOs)
- Mutual Funds
Private Debt & Private Equity
- Mezzanine Loans
- Whole Loans
- B-Notes (Subordinated to the A-grade piece of the mortgage debt)
- Separate Accounts
- Private REITs
- Limited Partnerships