Capmark failure spells $2bn loss for KKR, Goldman

The real estate lender has filed for bankruptcy protection. Sponsors KKR, Five Mile and Goldman Sachs are set to record one of the biggest private equity losses in history.

US real estate lender Capmark Financial Group has filed for Chapter 11 bankruptcy protection, a move expected to result in the loss of $2.1 billion in equity invested in the company by Kohlberg Kravis Roberts, Five Mile Partners and Goldman Sachs.

The firms invested the equity as part of a $16.8 billion deal in 2006, giving them a 78 percent stake in Capmark. Previous financial statements filed by KKR Private Equity Investors, the listed vehicle with which the parent recently merged, suggested KKR was already holding the investment at zero or near zero.

Capmark said in a statement the company plans to restructure in a process that will “reduce its corporate debt and maximise value for its stakeholders”. It added that more than 40 of its subsidiary businesses included in the filing were operating as normal.  Not included in the bankruptcy filing were divisions including Capmark Bank, Capmark securities and Capmark Investments, which manages value-added and opportunistic commingled funds and separate accounts.  However, the company said that these subsidiaries could also file for Chapter 11 protection at a later date.

 “We view this reorganisation process as an unfortunate but necessary response to recent unprecedented conditions in financial and commercial real estate markets, which presented a significant challenge for Capmark and similarly situated finance companies,” Jay Levine, president and chief executive officer of Capmark, said in a statement. “By constraining the availability of capital, these difficult market conditions had a negative effect on all our core businesses.”

Should KKR, Five Mile and Goldman lose all of their investment, it would be among the largest publicly revealed private equity losses in history. Earlier this year, TPG lost around $1.3 billion of its equity invested in collapsed US bank Washington Mutual.  Past notable losses in private equity history have included Forstman Little’s $1.5 billion losess on its deals for XO Communications and McLeodUSA.

Capmark suggested it would file for Chapter 11 protection in early September, the same month it agreed to sell its North American mortgage business to Warren Buffett’s Berkshire Hathaway and Leucadia National Corporation for $490 million.
Capmark has fallen victim to falling values in US commercial real estate markets as well as increasing vacancy levels across the assets it has lent to.

According to a report by Bloomberg, the lender also hit financial difficulties as the default rate on US bank-held commercial mortgages more than doubled to their highest since the early nineties.