Friday Letter Disequilibrium

 Could the surplus of buyers making a mad dash to scoop up limited distressed opportunities actually emerge as a solution to the liquidity crisis?

GPs and LPs alike are familiar with the distressed debt story. Whatever you want to call it – market dislocation; mispriced assets – whole conferences dedicated to distressed debt opportunities in the US and globally are being descended upon by many an investment-hungry GP and LP.

At the recent IMN Real Estate Opportunity and Private Fund Investing Forum in New York sessions on opportunities in the debt market were jam-packed with delegates. Many were those who had already made moves in the debt arena while others were looking to see what the buzz was all about.

GPs who have sought to capitalize on the distressed debt opportunity have already directed large sums of capital to dedicated vehicles. In the past few months alone, firms such as Colony Capital, Apollo Real Estate Advisors and JER Partners have all launched real estate debt funds. Colony is believed to be targeting $2 billion (€1.3 billion) for its vehicle while Apollo is looking to raise a $1 billion debt fund targeting opportunities in Europe.

Private equity behemoth Blackstone, whose €3 billion European real estate fund has yet to have a final close, is also expected to go into debt in a big way.

But with a giant wave of capital pursuing what many industry practitioners perceive as too few opportunities, investors may find themselves hitting a roadblock in sourcing opportunities in a market saturated with eager buyers.

The disequilibrium arises from a number of factors. One GP told PERE this week that the number of fund managers trying to enter the distressed debt space far outnumber the availability of debt opportunities. The deep discounts expected by many fund managers may not play out as expected, he said.

The GP asserted that he failed to “see that much distress out there.” Rather than the property assets themselves being “distressed,” he said, what we are actually seeing are “distressed holders of debt.”

The sentiment is echoed by one private equity real estate lawyer who told PERE that the underlying real estate assets have not eroded. Leases are being paid, he said, and if the leases are being paid then the borrowers are getting money in order to pay the debt.

There is a potential upside to the story though. With so many buyers searching for too few opportunities could we start seeing bidding wars for debt opportunities? Are we, in fact, going to start seeing discounted debt that today would sell for 60 cents on the dollar selling tomorrow for a possible 90 cents, or even on par? Indeed we are forced to ask whether the manic influx of capital chasing distress investments will inadvertently resolve the distressful liquidity problem.