There are already more than 20 debt funds vying for institutional capital and yet several more managers are also moving into the market. Richard Lowe reports
Many of these vehicles were expected to have raised capital during 2012, but the widespread risk-averseness of investors, coupled with the challenging due diligence required for such a new type of investment, has meant that many managers are eyeing fund closings in the first quarter of 2013, some as early as January.
The biggest vehicle so far is AXA Real Estate’s CRE Senior 2, which has raised €500m for a senior debt strategy and is aiming to raise a further €250m this year. The fund makes up a relatively small part of AXA Real Estate’s wider debt programme, which includes funds and separate account mandates, currently €6.7bn in size in terms of capital commitments, more than half of which has been deployed in the market.
This makes AXA Real Estate one of the largest institutional lenders in the market, although a large portion of the €6.7bn is derived from AXA insurance group companies and so is internal money in a sense. However, Isabelle Scemama, head of commercial real estate finance, says there are more than 16 non-AXA entities with capital committed to the debt platform, a mix of insurers and pension funds from 10 different countries.
A number of France-based fund managers have also raised capital for senior debt funds, including Predirec Immo 2019, a joint venture between ACOFI Loan Management Services and Groupama Asset Management. The €280m raised is understood to come from clients of the latter, itself the fund management arm of French insurance and banking company Groupama. The objective is to raise €400m by the end of January.
A similar joint venture between AEW Europe and Natixis Asset Management is the AEW Europe Senior European Loan Fund, which has raised €240m from French insurers (possibly from the Natixis group) and is aiming to reach €500m. La Française AM has also secured €150m from its parent Crédit Mutuel Nord Europe for its LF Property Senior Debt Fund, and hopes to raise up to €400m in 2013. La Banque Postale Asset Management is also in process of raising up to €500m for its own senior Real Estate Debt Fund.
US-headquartered Colony Capital has also established a European debt platform based in Paris with a view to launching a senior debt fund. The company already pursues global distressed debt strategies out of its US business and manages the Colony Financial mortgage REIT. But the new European senior and whole-loan strategy, for which Colony Capital is seeking to raise €500m this year, is a part of a new venture.
Similarly, in the UK, M&G Investments is looking to use its expertise of investing its in-house insurance capital in the UK debt market to raise third-party money for a senior debt fund, the Senior Commercial Mortgage Loan Fund. The fund maanger already launched a mezzanine debt fund in 2010 from third-party investors and is also looking to launch follow-on junior and subordinated debt strategies.
Henderson Global Investors is employing a similar approach by marketing two funds concurrently: Henderson Senior Secured Real Estate Debt Fund, a senior debt strategy, and Henderson High Income Real Estate Debt Fund, a subordinated debt strategy.
Pramerica Real Estate Investors has confirmed it is raising capital for its latest in a line of funds targeting junior debt and preferred equity, Pramerica Real Estate Capital IV. But it is understood that the fund manager is looking to raise two concurrent strategies as well. The new strategy would not compete with the senior debt funds mentioned above, but would be more active in the ‘stretched senior’ or ‘subordinated senior’ part of the market, and would probably be comparable with Henderson’s ‘high income’ fund.
ICG-Longbow is another UK-based debt fund manager pursuing two vehicles side by side, albeit with a twist. It has raised £213m (it hopes to reach £500m) for a non-listed, closed-ended fund targeting mezzanine and whole loans, the ICG-Longbow UK Real Estate Debt Investments III. It has also raised more than £100m for a listed senior debt fund.
Another company that has turned to the public markets is Starwood Capital Group, which raised £228m for its Starwood European Real Estate Finance fund by listing on the London Stock Exchange. Starwood’s European business, led by Peter Denton, has already been advising and sourcing deals in Europe on behalf of Starwood Property Trust, the large US commercial mortgage REIT. The intention is to raise £500m in total for the new European fund, which will invest across the capital stack – from senior loans to bridge loans and other debt instruments – depending on where the best value is identified.
In 2012, Cheyne Capital launched the UCITS-compliant Cheyne European Real Estate Bond Fund, an open-ended vehicle that invests in senior, liquid CMBS and RMBS bonds. Since then, the fund manager has launched the Cheyne Real Estate Credit Holdings Fund, targeting higher returns by investing across the capital structure in CMBS and RMBS but also mezzanine loans. Cheyne Capital has raised $220m for the latest fund and hopes to increase this to $500m by the end of 2013.
Renshaw Bay has launched a non-listed real estate debt fund, but its strategy seems comparable to Starwood Capital’s in that it will consider a range of debt investments from whole loans to bridge financings. The fund, Renshaw Bay Real Estate Finance Fund, has seed capital from Renshaw Bay’s owners, and is targeting a final capital raise of £500m.
There is a lot of talk about the potential to raise debt strategies for German institutional investors, but as yet there have been less products coming to the market compared to the UK and France. iii-investments has launched a German Spezialfonds (a regulated vehicle designed specifically for German institutional investors) targeting senior and subordinated debt.
SIGNA Holding subsidiary SIGNA Real Estate Advisory is seeking to raise €300m from investors for a mezzanine debt strategy. The new platform, headed by Michael Morgenroth and Patrick Züchner – formerly of Gothaer insurance company – has already secured €50m in seed capital from SIGNA.
Other active managers
A number of other managers are known to be close to launching new products but were not able to go on-record. UBS Global Asset Management has been speaking to investors over the past 12 months about its proposed Participating Real Estate Mortgage Fund, replicating for the UK a strategy it has been pursuing some time in the US. The aim is to generate 8-10% returns mainly through an interest coupon but also through a share of rent and capital appreciation.
DRC Capital is set to follow up its existing mezzanine debt fund, the European Real Estate Fund, with a new vehicle this year. LaSalle Investment Management’s existing debt funds, LaSalle UK Special Situations Fund I and LaSalle Junior Loan Programme, are almost fully invested and is planning new products. LaSalle said it was targeting investments across the capital stack in UK, Germany, France and northern Europe.
Blackstone Real Estate Debt Strategies (BREDS) is currently raising capital for a second global real estate debt fund, a third of which would focus on opportunities in Europe. It already has $100m in European mezzanine investments and, given that it is seeking to raise $4bn for the new fund, it has the potential to become the largest mezzanine lender in Europe.
BlackRock has a history of investing in US real estate debt through its publicly-traded investment trust Anthracite Capital and its private finance company Carbon Capital. It has launched three Carbon Capital funds over the years and the fund manager is looking into the potential to establish similar activity for Europe.
Cornerstone Real Estate Advisers, which also has a history of investing in real estate debt in the US, is in the process of establishing a European platform. It is making senior debt investments in the UK on behalf of its insurance parent Mass Mutual, with the help of Laxfield Capital, and is looking to build up a track record before seeking third-party investor capital for a number of different debt strategies.
Europa Capital has established Europa Capital Mezzanine platform, led by Michael Birch, to invest in mezzanine debt in the UK, with appetite for regional and small-sized deals. The fund manager is also looking to build up a track record by making investments on the balance sheet of its parent The Rockefeller Group, which seems to suggest it will be looking to third-party investors in the future.
Schroder Property is currently assessing the potential to establish a real estate debt business, as is Cordea Savills. The latter recently saw the departure of Keith Davidson and James Tarry who were originally hired to advise on making mezzanine deals for the Cordea Savills Prime London Residential Fund and to create other debt vehicles. The company is still interested in real estate debt investments, but is reorganising its proposition for investors.
Tarry has joined Aviva Investors to lead its move into the senior debt funds market. The fund manager’s parent Aviva already has a real estate lender in the UK.
First Property Group has also announced, separately, its intention to move into the senior debt market in the UK. It is not seeking to launch a fund, but is aiming to raise £500m for a separate account.