Debt fund allocations to Europe total $3.7b in 2012

The market share of debt funds compared to all private equity real estate funds launched in Europe in terms of target equity rose from 15% in 2011 to 20% in the first three quarters of 2012, according to an analysis by Swisslake Capital. However, the allocation for Europe remains far from adequate at just $3.7 bn (EUR 2.3 bn) so far this year. A year ago, the figure was $3.8 bn. In 2011, a total of $12.1 bn of equity was targeted globally.

In the first three quarters of 2012, 30 new debt funds were launched globally, exceeding the total for 2011 (20) by 50%. In terms of the target equity volume of these funds, the increase is even higher as the market share currently stands at 25% versus 16% in 2011. Swisslake attributed the sharp increase in volume partially due to two global mega funds launched in 2012 that are raising an aggregate $5.4 bn.

In terms of the number of debt funds launched, the peak was recorded in 2008/2009, following the outbreak of the financial crisis as many fund managers were expecting a fire sale of loan portfolios by banks. In 2009 a total of 58 debt funds were launched worldwide with targeting a total equity of almost $30 bn. However, as soon as 2010, the number of new fund launches declined drastically after it became clear that the big sell-off by banks would initially fail. Consequently, only 18 funds with target equity of $8.5 bn were launched in 2010 and most fund managers with 2008 and 2009 fund vintages put their offerings on hold.

Swisslake points out that many fund managers that were previously mainly specialized in real estate investments are now looking to build a successful business in debt funding segment. ‘It is premature to ascertain the prospects of such firms but time will tell if they are able to convince investors that they have the necessary expertise in the debt segment and thus are able to achieve attractive and sustainable returns when sourcing the right investment opportunities.’

A key concern, according to the analysis, is that this segment requires ‘a different skill set and an entirely different network from conventional real estate investments’. ‘Following recent discussions on the potential rating of debt funds, it remains unclear if such a move would benefit investors and provide a better insight into such instruments. This issue is further complicated if fund managers have very limited or no track record within the segment.’