GLOBAL - The European debt market now looks like that in the US in 2008 - with private equity firms and insurers most likely to plug the funding gap, according to Jeffrey Citrin, managing principal at private equity firm Square Mile Capital.

Speaking at an Expo Real session on what Europe could learn from US debt, he said: "I expect Europe to do what the US does. Private equity firms and insurers will plug the gap."

He compared the investment opportunity with the collapse of thrifts during the 1980s S&L crisis, when private equity investors, including Square Mile, invested to get at the underlying asset or restructure the debt. 

Square Mile has not entered the European debt market, though Citrin yesterday described it as "interesting".

But Rob Wilkinson, CIO of AEW Europe, which recently moved into European senior debt, pointed to differences between the markets, including primary sources of lending.

"Sources of debt in the US market have historically been deeper and wider," he said. "In the US market, banks do 50% of the lending. In Europe, it's 90% - and the question is how quickly insurers and pension funds can provide liquidity, at least the senior piece."

Despite the emergence of a few mezzanine funds and "an interesting play on the senior side", he said the emergence of an alternative to the banking market would take time.
"Don't underestimate the difficulty of getting equity capital into debt," he said.

In the meantime, the panellists agreed a revival of CMBS was likely in Europe, trailing the already underway recovery in the US securitisation market.

Chip Fedalen, head of the real estate group at Wells Fargo, which has $120bn (€92.8bn) in commercial loans in the US and invests across the capital stack, said CMBS would become more and more of a factor in the European debt market.

"We stepped into the US CMBS market just as it went away," he said. "Today, it has come back deeply."

Citrin agreed. "Before the crash, you had aggressive lending against valuations that were fantasy," he said. "Now that's stabilising and beginning to rebound."

However, he warned that CMBS investors were effectively bond buyers, adding: "If the underlying are not stabilised, cash-flowing assets, there will be a problem."

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