Keen to conquer credit

Goldman Sachs is preparing to launch a $2 billion US and European real estate debt fund this month, providing further evidence of the way managers see an opportunity in credit.

This month, Goldman Sachs is set to launch a second multi-billion dollar debt fund. Hot on the heels of its first real estate credit fund, GS Real Estate Mezzanine Partners, the firm will begin marketing the follow-up in two or three weeks’ time.

Notably, according to market sources, the new fund will be a ‘global’ one, targeting both the US and Europe, and is expected to try to raise between $2 billion and $2.5 billion from investors. Assuming it achieves $2 billion and given that it will leverage up 50 percent, the fund will have at least $3 billion of firepower to invest in real estate credit opportunities.

This is exciting stuff, and very much part of the bigger picture – the way hitherto equity-only focused investors are getting involved in the great deleveraging phenomenon that is working through in markets around the world.

Just to underline the theme, PwC today suggested there is to be a further uptick in European banks shrinking their balance sheets this year. PwC said European banks that currently have around €2.5 trillion of unwanted loans portfolios are expected to shed some €60 billion of them in 2013. This compares with around €45 billion in 2012 and €36 billion in 2011.

Property services firm DTZ has already worked out that bank deleveraging in Europe is creating an amazing refinancing shortfall that will likely top €150 billion in the next year. And, as BlackRock said over the summer in a paper on the subject, this provides a “unique dislocation” for potential debt investors. Because of supply/demand imbalances, junior real estate debt investors can aim for higher yields and better returns than equity investors.

In Europe, the demand for credit-related investment is dramatically broadening as well. For example, just before Christmas, Starwood Capital Group raised £228 million for its new European real estate debt platform via an IPO. Starwood European Finance – or StarFin, for short – placed 221.3 million shares at £1 each on the London Stock Exchange, opening up a public route for investors to gain upside from the great unwinding by traditional real estate lending banks.

It’s not surprising that some of the most entrepreneurial minds in the asset class have turned their attention to investing in debt. It is likely that in the years to come, private equity real estate professionals will look back upon this era as a great vintage for debt funds. Goldman is excited about it, BlackRock is excited about it, Starwood is excited about it and you can add a plethora of other names to a long list of others now participating in the private debt arena.

Furthermore, it is not just happening in real estate, but in mainstream private equity and infrastructure as well. Indeed, we estimate there are around 200 private debt funds across the three asset classes chasing $124 billion in commitments right now.

In short, the retreat of traditional lenders in backing new deals means the lending landscape is changing and private debt funds are looking to step into the breach. Yes, there are big and interesting question marks over how investors allocate capital to debt, how much scope there is for alternative sources of capital to provide senior debt as opposed to junior pieces and what the new role for banks will be longer term as a result of regulation. How well funds can operate alongside banks also remains to be seen. But despite these challenges and more, alternative providers of credit and investors into the private debt market look set to force their way in.

PS: Needless to say we’re excited, too! Our new sister title, Private Debt Investor, will be going live in the first quarter of 2013. For a snapshot of its dummy issue, please click HERE. You’ll be able to download the inaugural PDI roundtable, in which leading professionals discuss the role private debt has to play in financing real estate, private equity and infrastructure assets, and why it’s deserving of a place in investors’ portfolios.