EQT Exeter, the real estate business of Swedish private equity firm EQT, has just closed its largest-ever fund, EQT Exeter Industrial Value Fund VI, on $4.9 billion.
The fund – which has a value-add strategy to acquire, develop, renovate, lease, operate, and sell US industrial properties – is the largest vehicle focused on the sector to close this year to date, according to PERE data.
Fund VI is also the fifth-largest logistics fund to close since PERE began tracking fundraising data.
According to Ward Fitzgerald, chief executive at EQT Exeter, Fund VI is still “minimally deployed,” but the firm has a clear idea of what the opportunity set for the vehicle will be.
“Prices are down somewhere between 15 and 25 percent on average,” Fitzgerald told PERE the day after the fund close was announced. “We are going to be able to take advantage of a good entry point in both yield and in cost per square foot relative to 18 months ago.”
He expected investment opportunities to arise through both distressed debt and foreclosures because of the lack of bank liquidity and sponsor equity in the market.
“There’s a lot of groups that will have loan maturities that will not be able to refinance very well because they don’t have deep balance sheets or equity capital availability,” Fitzgerald said. “And so there will be distress again, although it will be moderate in comparison to 2008, but of course, it will be exceptionally robust compared to 2020. I think that’s an opportunity we’re going to be able to take advantage of.”
Although EQT Exeter has debt specialists on its team, and sometimes will get repaid on the loans it acquires, the firm more often takes a loan-to-own approach with distressed debt.
“Sometimes the economics of a given situation is apparent that it’s more likely than not that we’ll end up with the asset after we buy the loan,” Fitzgerald noted. “And so we underwrite it in that fashion.”
He anticipated approximately 20 percent of Fund VI’s capital will be deployed in a distressed debt scenario, referring specifically to situations where a lender does not want to refinance an asset, wishes to sell a loan, or wants to foreclose on the property.
EQT Exeter previously invested in distress with its Exeter Value Add Fund II, which closed on $625 million in 2012, according to PERE data. In that fund, distress accounted for 30-40 percent of the vehicle’s dealflow, because of the greater amount of banking distress and significantly higher leverage levels at the time. One difference between the opportunity set between Funds II and VI, however, is the amount of speculative construction in US logistics going into the current recessionary period compared with the global financial crisis.
“There wasn’t nearly as much construction in 2007-8 as there was in 2021 and 2022,” Fitzgerald observed. “There might have been 100 million square feet of spec space in a two-year period. And in this most recent two-year period, there might have been close to a billion.”
The “overhang” of speculative construction is relatively concentrated in the US, primarily in non-coastal cities in the Sunbelt region that have attracted a lot of investment because of the population growth in those markets, he noted.
“It’s very easy for speculative developers to convince capital that they should be building into these markets because of the growth. So the growth story outweighs the moderation story. And so right now, there is an absolute abundance of one-million-square-foot-warehouses in Dallas and in Atlanta, maybe 500,000-square-foot warehouses in Phoenix.”
However, there has been misalignment between supply and demand, which has led merchant builders to build one-million-square foot facilities instead of 100,000-square-foot facilities, partly because of the fees they can earn based on the size of the projects they develop, he remarked: “I think we’ll buy a lot of big vacant warehouses in the Southeast because that’s where the biggest distress will be.”
The buying of such assets is largely not expected to happen in the immediate term. Compared with a typical fund, Fitzgerald predicted deployment of Fund VI, which has a 36-month investment period, “would be back-ended” in anticipation of further correction in the market.
EQT Exeter broke into the top 10 of this year’s PERE 100 ranking, rising eight spots from 18 in last year’s roster of the biggest fundraisers in private real estate.
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