Funds ‘shut out’ of Europe RE loan sales

The European distressed market is perceived by some as an ‘invitation-only’ market favouring the very largest private equity funds, according to a survey.

A prominent American loan sale advisor is accusing the European market place of shutting out many funds that are otherwise able and willing to buy real estate loan portfolios.

US company, The Debt Exchange (DebtX), said in order to build liquidity, European sellers needed to start regular sales with smaller loan pools to encourage bidding from more investors. As greater liquidity develops, it said, additional funds would be created to “absorb” the debt currently held by European banks.

The point is made in a white paper called the ‘European Distressed Loan Buyer Survey’ in which DebtX argued that European financial institutions were missing opportunities to sell distressed loans because the ‘structure’ of loan sales precluded many small-to-mid tier institutional investors from bidding.

Investors told DebtX that financial institutions wishing to sell distressed debt appeared willing to sell only to the largest institutional investors. Those investors urged financial institutions to make the bidding process more open and transparent. In a number of instances, investors confided they had conducted lengthy due diligence that was essentially wasted because the bids were not given serious consideration.

DebtX said it polled more than 50 clients with €150 billion of funds under management. By offering loan sales that appealed to investors of all sizes, the study concluded that there would be more bidders, more liquidity, and thus a greater opportunity to maximize the price of the loans for sale. If liquidity grew for distressed bank loans, financial institutions and governments could “move beyond the balance sheet gridlock holding back the Eurozone” according to the survey. The best current market estimates, it added, were that Eurozone banks are holding onto more than €2 trillion of non-core assets.

Sixty percent of the survey respondents indicated that they were seeking to invest in opportunities requiring less than €100 million in equity. Meanwhile, only 12 percent of the survey group said they had the resources to bid on opportunities requiring greater than €250 million.

Investors participating in an auction or other sale structure were often critical of sellers, saying the institution concerned entered the process with “unrealistic expectations”. In interviews, investors frequently cited examples of banks not selling at the end of lengthy and expensive due diligence processes, although multiple bids were received. “From the investors’ perspective, if an auction validates a market price, it is unacceptable that the seller does not execute the sale,” said DebtX.

Other key findings were that demand for loans was strongest in Germany, but was also growing in other major Eurozone countries; demand is highest for distressed retail, multifamily, office, and residential property loans; investors prefer bilateral loan structures but will consider more complex situations. Furthermore, investors want a more open and fair bidding process, it also said.

Things have become so limited for smaller funds that they are “frustrated”. The survey found that having raised funds to invest, investors were finding themselves being “barred”. “The European distressed market is perceived by some as an ‘invitation-only’ market favoring the very largest private equity funds,” it said.

Surprisingly, said DebtX, investors showed little preference for the size of assets being sold in loan pools. As long as the aggregate pool did not exceed a fund’s absolute targets, the composition of the underlying pool did not appear to be a factor. Investors were equally interested in bidding on a pool containing twenty-five €2 million loans as on as a pool consisting of five €10 million loans.

Outside of Germany, demand is high across all geographies, with the exception of Greece. Spain remains a strong focus of interest, even with the current market volatility. Investors showed little difference in appetite between the core market of some countries and the less developed secondary cities. Greece is notable for the low level of interest.

With North American banks increasingly offering financing for distressed debt purchases, vendor finance is likely becoming less of an issue, DebtX added.