Banks in a jam

European banks and their need to reduce the real estate loans on their balance sheets dominated a private equity real estate panel discussion at the MIPIM property show in Cannes, France, last week.

In a session entitled Private Equity: European distressed investing, Lone Star Funds, TPG Capital, The Wellcome Trust and GIC Real Estate discussed the levers for some banks to sell property loan pools at discounts, and also addressed the issue of whether doing so wouldn’t simply deepen the hole in the banks’ under-pressure balance sheets.

After explanations from TPG Capital’s Robert Weaver and GIC Real Estate’s Bernard Phang of their respective firm’s attitudes towards real estate investing in Europe, Lone Star managing director in Europe, Juan Pepa, said he was seeing significant deal flow from European banks that were under pressure to sell large pools of real estate loans.

Pepa explained banks had a need to sell for various reasons including as a result of a merger process in which the buying bank didn’t want exposure to European real estate, or because a bank wanted to send a clear message to the world that it was out of the commercial real estate financing business in Europe.

He said Lone Star had the core competence that “ended up bringing benefits” to banks that needed to dispose of assets. “Today, in terms of volume of product in Europe, we see a lot,” he added.

The issue of how banks could afford to sell large loans pools at significant discounts was highlighted by a member of the audience during the session who questioned whether selling at a discount would not just weaken the balance sheet of the bank in question.

Peter Pereira Gray, managing director, investment division of The Wellcome Trust, said it could make sense for banks to sell loans at a discount despite that danger. One key driver, he said, would be the need to raise capital in order to meet the requirements of Basel III. He referred to new banking rules that could force European banks to raise nearly €200 billion in new capital or cut their balance sheets by nearly 20 percent.

He also gave a glimpse of how his organsiation viewed distressed asset deals. “Would Wellcome find distressed assets interesting to buy? We would, but we would need a very strong partner with infrastructure to do that. My observation at the moment is that there is quite a lot of risk being taken in the distressed deals being done, and there are relatively few firms that are competent to take on those deals.”