Starwood Capital raises £228m in European debt IPO

Starwood European Real Estate Finance has managed to raise a public real estate debt fund offering senior debt, whole loan, and mezzanine financing across Europe.

Starwood Capital Group, the Greenwich, Connecticut-based private equity real estate firm that announced the creation of a European real estate debt platform last month, has raised £228 million for it via an IPO of the company.

Starwood European Finance – or StarFin for short – has placed 221.3 million shares at £1 each (€1.2; $1.6) on the London Stock Exchange, it said.

Stephen Smith, chairman of the company, who recently joined from UK REIT British Land where he was chief investment officer, said in a statement: “We are very pleased to have received such broad demand for the IPO which is the largest investment company launch and the second largest IPO fundraising on the premium segment of the UK Official List this year.”

StarFin is led by the Starwood European management team, including Jeff Dishner, a senior managing director who relocated from the US to London last year as president of Starwood Capital Europe in order to take advantage of opportunities in Europe.  

He said: “The property sector has a well-recognised and large debt funding gap that will be only fully addressed through the development of alternative sources of capital other than the traditional banking sector. Working with the wider Starwood Capital Group and Starwood Property Trust the Company will now seek to exploit this strategic change by finding and funding compelling investment opportunities in real estate financing in Europe”.

The other senior professional is Peter Denton, head of European debt.

Starfin is also backed by Cushman & Wakefield Investors, the London-based real estate investment management arm of real estate broker and services firm, Cushman & Wakefield. It signed a letter of intent over the summer to become a minority owner of the business. Cushman & Wakefield Investors will help source loan deals for Starfin using its broker network.

The new company will focus on the UK and northern parts of Europe and will follow a “broad loan origination business”, lending directly to property owners, as well as acquiring parts of loans made by other lenders. It will invest across a combination of senior, whole, subordinated, bridge and development loans with a maximum portfolio loan-to-value of 75 percent. Typical loan sizes will be from €40 million for whole loans and from €20m for subordinated loans, though it could enter into larger loans across the industrial, office, retail and residential sectors.

Roughly half its investments are expected in the UK. Germany, France, Scandinavia, the Netherlands, Belgium, Poland, Switzerland, Ireland, Slovakia and the Czech Republic are likely to receive the balance. However, the company rules out Portugal, Spain, Italy and Greece and any investment in those countries in the future would require shareholder approval to amend the investment policy.

The prospectus also says the company will target a net total return on invested capital of 8 percent to 9 percent a year. Starfin, meanwhile, would earn a management fee of 0.75 percent of NAV, as well as a 0.75 percent asset origination fee. In addition, Starwood can earn 20 percent carry over a certain hurdle and the carry will be calculated by adding up total returns to shareholders over five years, and every five years after that.

Though Starwood is a significant player in the US where it runs the largest US commercial property-focused mortgage REIT, it has had a small presence in Europe. It sourced or acquired around $445 million of debt in Europe since the onset of the 2008 financial crisis. Nevertheless, that has been successful: some $208 million of that European debt has been exited, realising an IRR of 23 percent, according to the IPO prospectus.

The prospectus also says the company believes it will deploy half of its capital in its first six months and it should be fully invested within six to nine months.

It will restrict loans to values to 80 percent, though that could be extended to 85 percent if necessary.