At 1 pm on 29 April in the Manhattan offices of law firm Dewey & LeBoeuf, the fate of the $1.06 billion Capmark Structured Real Estate Partners fund finally will be known. After more than 16 months of uncertainty triggered by the Chapter 11 bankruptcy protection filing of Capmark Financial Group, the 2006 debt vehicle will be transferred to new management.
Having gone to press and with no immediate access to a crystal ball, PERE can’t confirm for certain the identity of the new GP running the vehicle. However, one frontrunner was in position to take over the fund at the time of publication: PCCP.
Last month, a Delaware bankruptcy court named PCCP the stalking horse bidder to take over the Capmark debt fund after it offered $7.55 million. Provided no higher bids are submitted at the 29 April auction, PCCP will find itself once again taking control of a debt fund from a distressed GP. In December 2009, the firm took over Lehman Brothers’ two real estate mezzanine funds, originally raised in 2005 and 2007.
For LPs in the Capmark Structured Real Estate Partners (CSREP) fund, which has been sub-advised by Urdang Capital Management, the auction could bring some welcome relief. Last spring, Lazard Freres, Capmark’s advisor, solicited interest for the management rights of the fund alongside Capmark’s LP co-investment. PCCP was one of the bidders, but it was ruled out after its bid fell outside the “accepted range.” A number of other unconfirmed names were linked with the transaction, yet one year later nothing had closed, prompting Lazard to return to market, this time offering the management rights to CSREP but not the co-investment.
“A lot can happen over the course of the year, and it did between the spring of 2010 and 2011,” said William Lindsay, founding partner of PCCP. Other firms, including Normandy Real Estate Partners and Square Mile Capital Management, looked at the deal earlier this year and took part in the bidding, while Urdang as sub-advisor had the right to match any offer, according to other people familiar with the matter.
When it comes to evaluating the fully invested fund, Lindsay accepts there will be some assets that perform well and others that won’t. Although Lindsay declined to go into specifics, one of the vehicle’s investments includes a $182 million loan secured against the failed Meadowlands Xanadu project in New Jersey, which Colony Capital, Dune Real Estate Partners and Kan Am handed back to lenders in August. According to bankruptcy documents, management fees relating to this deal will be significantly below the norm.
Lindsay stressed though that not everything was troubled. “It’s a common misconception that everything done in a certain pool must be troubled, and we have found that’s not always the case,” he said. Indeed, the CSREP fund was written up by 24.4 percent in the fourth quarter, according to documents from the California Public Employees’ Retirement System. Of course, that comes on the back of write-downs of 51.8 percent over the past three years and a negative 41.2 percent return since inception.
“There’s been a huge rally in real estate lately,” Lindsay said. “Core is in a bubble, and financial instruments are more valuable today than a year ago, with some exceptions. That’s been a real boon to investors in this type of fund, in that patience has paid off.” It also could be the reason why Capmark, which filed its reorganisation plan 11 days after PCCP secured its stalking horse status, is hanging on to its GP co-investment.
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