Friday Letter Europe's debt mania

A new £1 billion fund launch underlines how senior property debt funds targeting Europe are all the rage currently.

News reaches us – and you read it here first – that AgFe is planning to launch a £1 billion (€1.2 billion; $1.6 billion) senior real estate debt fund. AgFe, in case you are not aware, has been operating for six years primarily as a European financial advisory business helping central banks, regulators, commercial banks and other institutions in managing financial assets in loan or bond form.

AgFe’s forthcoming fund will focus on lending up to 70 percent of the value of a real estate asset in the UK and will be managed by a team led by Natalie Howard, a seasoned real estate operator whose résumé includes a stint running real estate debt funds at Lehman Brothers’ private equity real estate business for Europe and Asia. Prior to that, she led the real estate lending business at Barclays, where she also set up the bank’s commercial mortgage-backed securities business after leaving Morgan Stanley.

This is not meant to be an advert for AgFe, of course, but rather to serve as a new example of one of the hottest areas in European private equity-style fundraising at the moment – namely real estate senior debt funds. In AgFe’s case, it is making the transition from being an advisor to a fund manager, which will be of interest to many other real estate advisory businesses operating today that similarly harbour a desire to become investment managers themselves. That alone is a trend that in all likelihood will play out over the months and possibly years ahead.

However, the wider aspect is to note that the type of non-bank lenders bringing senior property debt funds forward is extremely varied from advisors to insurance companies to private equity real estate firms. The common link is that they all see the scope for what is basically a fixed-income product that offers what many investors want: low risk, steady returns that are higher than core.

Among the pack is said to be Prudential, the UK insurance company, which has an investment management arm called M&G Investments. PERE understands that M&G is in the throes of launching a £1 billion fund, having already successfully raised a mezzanine debt product with a dedicated team.

Another new name is Henderson Global Investors, which in March hired John Feeney as head of real estate debt. Feeney was a co-founder of Bank of America’s European and Asian real estate lending platforms.

Meanwhile, Fortress Investment Group is tipped to launch a debt fund, having recruited Cyril Courbage, a former European head of Deutsche Bank’s commercial real estate group, just as Goldman Sachs considers a debt product to serve Europe and the North America market. Starwood Capital Group also looks like it is planning a European debt fund, having recently hired Peter Denton, who used to work for Germany’s WestLB.

Surely, it is not hard to see the attraction of senior debt, given the arbitrage available between the cost of getting the capital and the interest rates on making those loans. At the same time, from a lender’s point of view, even if 10 firms managed to raise €1 billion each, that is not going to saturate the market even when one factors in all the alternative sources of debt moving in. Some experts say the annual run rate for refinancing real estate loans in Europe currently is running at four times the amount that all the firms mentioned above might raise in funds.

Moreover, just today, DTZ said Europe’s funding gap has more than doubled to $182 billion thanks to the European Banking Authority’s new capital reserve ratios piling pressure on traditional banks. The gap is defined as the difference between the existing debt balance secured by commercial property as it matures, and the debt available to replace it.

If one adopts a horizontal position in front of the TV set and watches the news about instability in Europe in relation to Greece and Spain, one can sympathise with institutional investors being wary about Europe. Still, with these fixed-income products and the demand-side clearly being so strong, it is little wonder these firms feel they can succeed in raising such a fund.