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EXCLUSIVE: Cerberus: ‘We haven’t altered return hurdles’

In an interview in this month’s PERE, Lee Millstein and Ronald Kravit of Cerberus Capital Management’s real estate team explain how it will ‘trade upside for downside protection’ on deals and has not lowered return thresholds despite competition

Cerberus Capital Management has said in an interview with PERE magazine that it has not altered its return thresholds on transactions despite rising values in US real estate and stiff competition for assets in Europe.

In an interview published in this month’s issue, the New York-based firm also reveals it is planning to open an office in Dublin, where it has been active, and that it is working on a deal in Costa Rica by way of an example of how it likes to “go where the opportunity is.”

Lee Millstein, who runs European real estate and European distressed investing, and Kravit, head of US real estate investing, provided insight into how the firm operates over two separate interviews. Kravit said: “We are never forced to invest in any market because our capital has that flexibility. But I think our investors trust us that we are going to find what we think are the best opportunities globally and that is where we are going to jump.”

Cerberus has concentrated a lot of investment activity in Europe, investing more than €11 billion in the region since 2011. It maintains offices in London, Frankfurt, Madrid, Baarn near Amsterdam and recently opened in Belfast. A new office is planned for Dublin, they said.

Despite the way an abundance of capital is chasing up values in the US and how so much focus is concentrated on Europe at the moment, the firm said it was not adjusting return parameters.

Millstein said, “to date, we are the second largest buyer of NPLs in Europe but we have not changed our return hurdles at all.” Added Kravit: “If it happens that we cannot meet them, we will pull back and look for the next opportunity, like how we are being disciplined in the US.”

Indeed, Kravit revealed that the firm does not put target returns in its marketing materials. “If people ask us, we say we haven’t lowered our return thresholds. We go up and down the capital structure and will take a 16 (percent return), or 15 percent if we are more senior. We will trade upside for downside protection. That is one of our hallmarks. Everything is about downside protection, risk mitigation and structure, which is why we do a lot of work only in jurisdictions where we have comfort that it is like the US.”

Asked about Cerberus’ strategy, Kravit said it was going to “continue to go down the road of Europe, continue being disciplined in the US and continue looking at selected opportunities in Asia”. There also might be a few opportunities in the Americas.

In Latin America, the firm has looked in Brazil, Colombia, Argentina and Chile so far. It has invested in Mexico in the past, but it has not found the “right opportunity” in these other countries of late. However, it is working on a transaction in Costa Rica that is “distressed but it is totally different.”

Summing up, Millstein said: “We think we are good at figuring out new markets. We’d never invested in Spain before 2010, and we are all over it now.”

See this month’s issue of PERE for the full interview.