Should debt managers look to the public markets, asks Shayla Walmsley, when capital-raising for private funds is so hard?
Real estate debt funds are the new black. According to research firm Preqin, debt funds launched in the third quarter alone are targeting more – $7.6bn (€9.4bn) – than all the funds launched last year combined. What is new – and what might indicate the beginning of a longer-term trend – is the decision of three new funds to target IPOs.
The obvious driver of the urge to list is that there is no shortage of competition for capital, even were the fundraising environment less challenging. All told, 41 existing real estate debt funds account for 13% of property investments. The three funds from Cheyne Capital, Starwood and ICG-Longbow announced their intention to list shortly after Blackstone started soliciting capital for its $13.3bn Real Estate Partners VII fund.
As Europa Capital's Noel Manns has pointed out, Blackstone, which attracted capital from major US public pension schemes with the promise of a 20% IRR, took a lot of money out of the pool. Lesser funds – at least in terms of size – need a significant platform, a major backer or more likely both to raise even a fraction of that kind of capital.
The three funds planning to list have little in common, except the backing of a major private player. Two of the vehicles – from Starwood, looking to raise £250m-300m, and hedge fund Cheyne, looking to raise £200m – are whole loan/mezzanine funds with an LTV of 75%. ICG-Longbow's is a senior debt fund looking to raise £100m-250m with an LTV cap of 65%.
Starwood's listed fund will be part of the US private equity firm's broader revamped third debt platform, in this case set up with Cushman & Wakefield Investors. Starwood declined interviews this week, but in a statement it made clear that it was ruling out pretty much nothing property debt-related. Although the geographical focus is circumscribed – it will focus on the UK and Northern Europe – the fund will originate and acquire senior, whole (from €40m), subordinated (from €20m), bridge and development loans across all sectors.
In contrast, ICG-Longbow's fund, which is seeking a listing on the UK's main bourse, is targeting senior loans purely in commercial. "The research we've done suggests significant demand for the listed market because it's liquid and straightforward," says David Hunter, chairman of the 51% Intermediate Capital Group subsidiary, adding that it makes sense to list the senior debt fund because it plans to invest the capital within a relatively short timeframe – nine months.
INREV earlier this month claimed several European debt funds had been jettisoned in recent years because of concerns over their ability to raise sufficient capital with enough speed to execute their strategy, not to mention find adequate deals.
In its first major report on debt funds, INREV found that scarce senior debt in particular had forced mezzanine fund managers last year to return to investors with a request to widen their remit (and lower their return expectations).
With the listed fund, ICG-Longbow will be targeting a new set of investors. According to Hunter, large institutions, including global pension funds, tend to opt for the more complex part of the market. "They have different aspirations for higher returns," he says. "In contrast, in the public market, a senior debt fund is digestible."
Hunter reckons takers for the listed fund will be smaller institutions and wealth managers sitting on their clients' money and seeking security and yield.
At one level, it makes sense to tap available sources of capital, and in all three cases the commitment is precisely that, rather than commitment to the listed market per se. Hunter points out that the group is committed to both markets, including more complex, whole-loan funds in its private equity business. As it approaches another closing for one of its whole-loan private vehicles, he says: "We're looking at full spectrum. We'll continue to offer debt funds, public and private."