Friday Letter Binging on debt

US firms with international operations are raising debt funds in Europe in the hopes there will be enough supply to satisfy them. 

When Apollo Real Estate Advisors announced earlier this week its intention to launch a $1 billion (€640 million) European debt fund, you could almost hear the collective sigh on the east side of the Atlantic. It seems that everybody is doing it.

Those who are familiar with the European operation of JER Partners, for example, know that it too has had such a fund in the pipeline for months and is rumoured to be raising €500 million. Market practitioners also expect Blackstone’s jumbo European fund – due to close soon – to go into debt in a big way.

These are just three examples of significant US fund managers intent on investing in debt rather than just equity, but there are many more that could be listed. In addition to the US firms, home spun groups in Europe are, of course, looking to enter the fray.

In a European real estate roundtable discussion hosted by PERE recently and to be published soon, David Ryland, the London-based property funds lawyer at SJ Berwin said he had seen a marked increase in the debt funds coming to the market. “The debt funds are largely based on the premise that there has been a market over-reaction in the under-pricing of corporate debt and that these values may get impacted further if notes get re-rated or mark to market issues force institutions to sell,” he said. “There is also a potential gap in the market for mezzanine loans since banks are no longer in the market for this,” he added.

The US firms are only replicating what they are doing in their own backyard in the hopes of developing their expertise abroad. In the US, Virginia-based JER is a seasoned debt investor and it added to the capital stack destined for the space only last December when it raised $220 million for its JER US Debt Fund. That is being co-managed by the firm’s real estate investment trust JER Investors Trust and its private equity funds business.

In the case of Apollo, it has been staffing up its debt originating business, Apollo Real Estate Finance, similarly trying to grab opportunities while the window remains open. Earlier this year it employed John Beaman, former head of CMBS trading at Lehman Brothers.

The size of the debt opportunity in the US is unquestionably larger than in Europe, of course, but the main players clearly believe there will be enough on the table for them in London and Frankfurt to satisfy the capital being raised. Though there are some signs that banks in Europe have reached the bottom of the trough and there is talk of inter-bank lending activity beginning to return, the potential returns from debt investments continue to look attractive. While that remains to be the case, expect to hear more announcements in due course of further debt funds in the region.

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