Debt Funds: The rise of real-assets lending

A record number of infrastructure debt funds are in the market today, while 2015 was a strong year for real estate debt fundraising. Andrew Moylan reports

Investment funds targeting real estate debt and infrastructure debt are both experiencing strong interest from investors. But strong competition is leading to the emergence of a handful of large funds grabbing most of the market share.

There have been 247 private real estate debt funds reach a final close since 2008 (as at 8 January 2015), raising an aggregate $101.8bn in institutional investor capital. While fundraising in 2015 did not reach the levels seen in 2014 (36 vehicles raised $25bn), it was a relatively strong year for the asset class: 29 funds reached a final close and raised $14.8bn, above the rolling seven-year average ($12.4bn).

Furthermore, the five largest funds were responsible for over half (55%) the capital raised in 2015, echoing trends across the general fundraising market as investors placed their capital in fewer, generally larger funds. The largest real estate debt fund to reach a final close in 2015 was CRE Senior 9, managed by AXA Investment Managers – Real Assets. The fund raised €2.9bn and invests in commercial real estate loans secured by European assets.

Unsurprisingly, real estate debt funds focused on the traditional property markets in North America and Europe represent the vast majority of funds closed and total capital raised since 2008. In that time, funds focused on debt investment in North America have secured 68% of total capital since 2008, while Europe-focused funds have represented a quarter of the total capital raised. Last year, 17 North America-focused vehicles closed, raising $9.1bn, and seven Europe-focused funds closed and raised $5.2bn.

As of January 2016, there were 56 private real estate debt funds on the road, targeting an aggregate $30.3bn, illustrative of the competitive fundraising environment for these vehicles. Of the 56 funds in market, 22 have already held an interim close, securing $5.9bn in capital commitments. Compared with the number of debt funds closed annually, the large number of funds in market suggests that fund managers expect further growth in the coming years.

The largest real estate debt fund in market is Blackstone Real Estate Debt Strategies III, which is targeting $4bn from investors. The fund will focus primarily on high-yield lending on commercial real estate through new loan originations and purchases of legacy loans and securities. Blackstone Group is not the only manager looking to raise substantial amounts of capital for debt funds over the coming year; Colony Capital, Torchlight Investors, AgFe and ICG-Longbow are all in market, seeking over $1bn each for their new funds.

Unlisted infrastructure debt funds, meanwhile, are a growing part of the infrastructure fundraising market. While the willingness of banks and other traditional sources of capital to finance infrastructure projects has improved since the financial crisis, the capital and liquidity requirements of Basel III and Solvency II remain an impediment to increased lending. The market for alternative sources of debt has strengthened, with a higher number of unlisted infrastructure debt funds in market seeking more aggregate capital than ever before.

While banks are likely to be the main source of capital for most infrastructure players, debt funds also play an important role. According to a recent Preqin study, 67% of fund managers expect that debt funds will provide financing for their transactions in 2016, including 17% stating it will be their main source of capital.

Of the 30 solely debt-focused funds to have closed since the first was launched in 1998, funds targeting Europe have raised the largest amount of capital ($4.8bn), the largest individual fund being the £739bn Macquarie Debt Fund. A greater number of funds have closed focused on Asia (nine) compared to Europe (eight), although Asia-focused debt funds have raised significantly less capital ($500m). Interestingly, only five North America-focused debt funds have closed raising $2bn, the same as debt funds focused primarily on investment in Latin America. 

Along with trends seen in the overall fundraising market, 2015 has seen a greater level of capital raised by fewer debt vehicles closing; for example, three funds were responsible for 83% of the capital raised during the year. The largest fund was CCCC First Phase Equity Investment Fund, which raised ¥15bn for investment in mainly build operate-transfer (BOT) or build-transfer (BT) projects and general development projects in China.

“Compared with the number of debt funds closed annually, the large number of funds in market suggests that fund managers expect further growth in the coming years”

As of January 2016, there are 36 unlisted infrastructure debt funds on the road, targeting an aggregate $22.5bn. This represents a record number of debt funds in the market and illustrates the increasingly competitive fundraising environment for these vehicles. Compared to the number of debt funds closed, the large number of funds in market suggests that fund managers expect further growth in the coming years.

There are two unlisted infrastructure debt funds in the market that are targeting $2.5bn in capital commitments. The first, Carlyle Energy Mezzanine Opportunities Fund II, will target negotiated mezzanine investments in real asset-based energy exploration and production companies, as well as independent power projects and companies located primarily in the US and Canada. 

The second fund is Global Infrastructure Partners’ maiden infrastructure debt fund, Global Infrastructure Partners Capital Solutions Fund, which invests in debt instruments tied to the energy, transport, water and waste sectors in greenfield, brownfield and secondary market infrastructure assets on a global scale.

Andrew Moylan is head of real assets products at Preqin