For Park Madison Partners, much of the fundraising activity in 2016 will center on commercial real estate debt.
“In both the US and Europe, we are seeing increased investor appetite for real estate debt strategies, often as an alternative to core,” said John Sweeney, vice president at the New York-based capital raising and advisory firm.
In the US, more than 40 percent of the commercial mortgage-backed securities market is scheduled to mature between 2016 and 2017, and some of these loans will require additional capital or loan workouts as the values of underlying properties remain underwater, Sweeney said. Additionally, by next December, Dodd-Frank’s risk retention rules will require CMBS issuers to retain a 5 percent B-note for at least five years. “All these factors could create opportunities for private lenders,” said Sweeney.
Meanwhile, the European Banking Authority estimates that banks in the European Union currently hold over €1 trillion of non-performing loans, and are under considerable pressure to clean up their balance sheets. Faced with an unpredictable regulatory environment and general staff reductions, many banks have become less viable as lenders. Those that are lending seem to be focused mostly on prime properties in the most liquid markets, and at low loan-to-values, according to Sweeney.
“We have certainly seen more managers interested in entering the space because I think the opportunity is widely recognized,” he said. In fact, many managers that currently are raising funds have traditionally been purely equity managers, and had never had a debt fund until now.
Such firms view the debt strategies as complementary to their equity strategies, since they can originate loans for transitional assets where the borrower intends to implement a value-add business plan, Sweeney said. Because the managers have been value-add equity operators themselves, they can determine whether the business plan is viable and assess the risk return profile of the loan. “Transitional assets are where we've seen one of the largest lending gaps due to regulatory restrictions on banks,” said Sweeney.