GLOBAL - Distressed debt fundraising from institutional investors reached record highs in 2008 as a result of the volatile markets, according to Preqin's latest monthly report.

The 2009 Preqin Real Estate Distressed and Debt Review suggested a total of $116.7bn (€91.7bn) was raised last year by 166 funds, as the deeply distressed credit markets and limited availability of financing prompted fund managers to focus their attention on distressed and debt property markets.

Funds have grown in size, stepped up their activity and in some cases recruited managers normally associated with opportunistic and value-added markets in order to take advantage of distress in the markets.

According to Preqin's research, debt funds, distressed debt funds and distressed situation funds are currently the key players.

Debt funds aim to take advantage of the current liquidity crisis and assume the role of traditional lenders like banks by offering financing to property developers or owners.

Distressed debt funds look to invest in distressed debt opportunities and turn debt into equity, while distressed situation funds purchase property from distressed sellers and may also provide financing to developers strapped for cash.

The report insists these funds have played a vital role in keeping the real estate asset class active and efficient by providing alternatives for market players in need of help.

They have also allowed investors to achieve equity-like returns when other equity funds have been unable to.

Over the last year, the Lone Star Fund VI was the largest debt, distressed and opportunistic fund in the market, raising $7.5bn.

Lone Star recently launched the $10bn Lone Star Real estate Fund II, a distressed solutions fund looking to invest in distressed commercial properties, and the $10bn Lone Star Fund VII, which will target distressed residential mortgages and defaulting corporate bonds and loans.

The report also suggested 46 funds which closed between 2007 and 2008 focused primarily on North America and raised $33bn, representing 69% of all capital raised by distressed real estate funds.

With a staggering 75.6%, the US has the largest investor base for distressed and debt markets, followed by the UK with 4.7% and the Netherlands with 4%.

Preqin also said the Royal Mail Pension Plan in the UK is a key investor and is accessing distressed markets through Jones Lang LaSalle's Asia Opportunity Fund III.

Outside the US and Europe, Australia has the largest distressed and debt investor base, with 2.5%, of which most are superannuation schemes.

Key distressed or debt real estate funds that closed last year included the Rockpoint Real Estate Fund III, Morgan Stanley Real Estate Mezzanine Partners fund and the European Property Investors Special Opportunities fund.

Preqin is confident investors want to maintain their allocations to the closed-end property market given that it has delivered strong returns in the past. However, it expects the market for distressed and debt funds will slow down once liquidity becomes more available.

The 2009 Preqin Real Estate Distressed and Debt Review covers 137 distressed and debt fund managers and 145 institutional investors currently investing in the distressed property markets.

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