Perseus: overload of funds chasing debt

The Washington DC-based private equity real estate firm argues there are too few distressed commercial real estate debt opportunities to satisfy the number of fund managers entering the space.

Fund managers targeting distressed debt in private equity real estate face diminishing opportunities, according to Washington DC-based firm Perseus Realty Partners – because there is too much capital chasing too few investments.

Speaking to PERE, Paul Dougherty, president of Perseus, said the deep discounts expected by many fund managers would fail to materialize, insisting: “I don’t see that much distress out there.

“When you talk about distressed debt in the commercial real estate universe you are talking about the assets being distressed, being in default. What we are seeing are distressed holders of debt, not distressed debt.”

He added that market-wide distress in office, retail, industrial and multifamily had yet to be seen, adding: “While there are over-leveraged properties on a select basis, many of the properties are in relatively strong institutional hands that won’t fire sale unless they absolutely have to.” Taken with great transparency in market information also diminishes the chances of exploiting mispriced assets, he said.

Dougherty’s comments come as numerous private equity real estate firms launch debt-focused funds or are restructuring existing funds to take advantage of the perceived opportunities. However, for Dougherty, the distress is in the financial markets “not real estate markets.

“The dislocation is not as a result of an over-supply [of real estate] but as a result of the capital market implosion. People were expecting deep discounts, but they’re not getting them and unless they use a lot of leverage to enhance returns not going to get opportunistic returns. And we don’t see lender appetite to provide leverage to these funds to help them get opportunistic returns.”

In the past few months, 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), while Apollo is looking to raise a $1 billion European debt fund. JER is believed to be raising €500 million for European debt, and Blackstone’s €3 billion European real estate fund – due to close soon – is expected to go into debt in a big way.

Dougherty said he expected liquidity restrictions to ease over the coming year further dampening distressed opportunities. The former CBRE Capital Markets managing director is instead focusing on investments in multifamily and senior housing in the US, particularly in coastal areas, which Dougherty said were “in the early innings of the game.”

Perseus, founded in 2005, held an initial closing on its $200 million fund, PRP II, in April, according to the firm’s website, targeting middle market office, industrial, multifamily and retail assets. The fund is expected to hold a final close this month.