Debt funds dominate capital raising

Real estate debt funds dominated private equity fund-raising in Europe in 2012 with a market share of more than 25%, according to research published by Swisslake.

For the first time ever, real estate debt funds dominated fund-raising in Europe last year, accounting for 15 newly launched funds targeting an equity volume of €7.1 bn. In total debt funds accounted for a 27.4% share of the total fund-raising market in terms of equity volume, nearly double the share of the previous year which came to 15.9%.

Currently no less than 36 debt funds are seeking to raise an aggregate equity volume of more than €20 bn in Europe, Swisslake said.

In terms of risk-return profile, all debt funds are either core oriented (nine funds) or value-add (five funds). Only one debt fund invests in opportunistic investments.

European debt funds launched in 2012 are mainly focused on investments in Germany and the UK. According to Swisslake, the main reason behind the attractiveness of these two markets lies in the fairly large number of foreclosed banks where fund managers are seeking to acquire the most attractive financing or assets.

The average debt fund is targeting €473 mln in equity which is significantly higher than the average size of European funds of €320 mln.

'Should the current financing environment remain as it is debt funds are not likely to go away any time soon and are establishing themselves as an integral part of the private equity real estate industry in Europe,' the report said.

Swisslake said debt funds offer a number of benefits compared to traditional private equity real estate funds. Assuming a 50% senior loan, investors are much less exposed than with traditional vehicles. In addition, due to the nature of debt investments investors typically receive monthly or quarterly interest payments, which can serve as an efficient indicator for whether an investment is successful or not.

But it is not all plain sailing, the advisor added. Disadvantages include the lack of possibilities to influence the property management.

Swisslake is an independent investment advisory firm based in Switzerland.