The popularity of raising debt funds among fund managers was put into sharp focus today as independent investment advisory firm Swisslake said lending vehicles now accounted for 20 percent of all new funds launched this year.
In a research paper called “Debt funds: On the path to close the real estate financing gap”, the firm said the market share of debt funds in terms of equity rose from 15 percent in 2011 to 20 percent in the first three quarters of 2012.
Providing an alternative source of capital for real estate is seen as an opportunity because banks in Europe are retreating. Swisslake said the outlook for credit remained “bleak” as current estimates are that banks in Europe will reduce lending by €500 billion in the coming years.
The firm also argued that non-bank sources of real estate finance were unlikely to be sufficient to plug the gap.
“Debt funds, which are becoming increasingly popular, seem to offer promising solutions to fill these gaps. Taking into account the fact that in 2011, a total of $12.1 billion of equity was targeted globally and only a portion of that was intended for Europe, it becomes instantly clear that debt funds will not suffice to close the financing gap,” Swisslake explained.
The alacrity with which fund managers have launched debt funds has oscillated over the last three years. Swisslake has found the peak was recorded in 2008 and 2009, following the outbreak of the financial crisis as many fund managers were expecting a fire sale of loan portfolios by banks. In 2009 a total of 58 debt funds were launched worldwide targeting a total equity of almost $30 billion.
However, as soon as 2010, the number of new fund launches declined drastically after it became clear that the big sell-off by banks would initially fail. Consequently, only 18 funds with a target equity of $8.5 billion were launched that year and most fund managers with 2008 and 2009 fund vintages were noticed to be putting their offerings on hold.
Today, however, Swisslake said the “pessimism” seemed to have faded. In the first three quarters of 2012, the number of funds in the market, 30, has surpassed the total number of funds launched in 2011, 20, by 50 percent and the corresponding market share in terms of the number of funds has increased from 8 percent in 2011 to 17 percent for the first three quarters in 2012.
Swisslake was quick to point out, though, that the sharp increase in volume is partially due to two global mega funds launched in 2012 that are raising an aggregate $5.4 billion, though it didn’t name them.
The company added that many fund managers that were previously mainly specialised in real estate investments were “keen to peg on the global trend” in order to build a successful business in this niche segment. “It is premature to ascertain the prospects of such firms but time will tell if they are able to convince investors that they have the necessary expertise in the debt segment and thus are able to achieve attractive and sustainable returns when sourcing the right investment opportunities. However, looking back, it can be noticed that debt fund managers have solely focused on this niche segment and not dabbled into areas beyond their expertise. The segment requires a different skill set and an entirely different network from conventional real estate investments.”
It added: “Following recent discussions on the potential rating of debt funds, it remains unclear if such a move would benefit investors and provide a better insight into such instruments.”