Summary
We underwrote exit cap rates that assumed a rate environment we had no basis to forecast. An account of the error and the process change that followed.
- Author
- Managing Partners
- Published
- 30 Apr 2026
- Category
- Firm
Investment letters are unusually good at describing success. This one describes an error, because the process change that came out of it is more useful to our investors than another note about a deal that worked.
The mistake
Across four acquisitions in 2021, we underwrote exit capitalisation rates broadly in line with entry. The reasoning at the time was that these were high-quality assets in supply-constrained corridors, and that the yield environment supporting entry pricing was structural rather than cyclical.
The first half of that reasoning was sound; those assets remain among the better things we own. The second half was not reasoning at all. It was an extrapolation of prevailing conditions dressed as an assumption.
We did not forecast rates incorrectly. We built a model that required us to forecast them and then did not notice that we had.
What it cost
Those four positions are, in aggregate, holding at approximately 0.87x of underwritten value at the equivalent point in their business plans. Contracted income has performed in line or slightly ahead; the entire shortfall is capitalisation rate movement. None are impaired, all are covering debt service comfortably, and we expect to hold each of them longer than originally modelled.
A longer hold is not a disaster. It is, however, a real cost to investors in that vintage, and describing it as "our conviction is unchanged" would be a way of avoiding saying so.
What changed
- Exit yields are now underwritten at a spread to the ten-year average for the sector and geography, never at entry. Where we deviate, the deviation is stated explicitly on the committee paper and must be argued.
- Every paper carries a rate-shock scenario at +200bp on exit yield, and the position must remain solvent and covenant-compliant under it.
- The failure case is written by someone who is not the deal sponsor. This is the change that has had the most effect, and it is the one we should have made years earlier.
The 2021 vintage will be fine. The process that produced it would not have been, which is why we no longer use it.
This note reflects the views of the Global Brick Group investment team at the date of publication and is provided for information only. It does not constitute investment advice or a recommendation to buy or sell any instrument. Figures cited are illustrative of the firm's approach. Past performance is not a reliable indicator of future results.