Federated Hermes rolls out first pan-European commingled property credit fund

Pennsylvania-based private equity firm Federated Hermes has rolled out its first commingled European real estate debt fund.

The firm has been operating in the European lending market via a separate account since 2015, building up a €1 billion loan book.

Speaking to Real Estate Capital Europe, Vincent Nobel, head of real estate debt at Federated Hermes, said the firm is fundraising for Federated Hermes European Real Estate Debt Master Fund, adding that the introduction of a commingled strategy was a “natural evolution” of its European lending business.

The company will provide senior loans/whole loans across Europe with an average loan size ranging between €20 million and €60 million (mid-market), at terms between 3 years and 5 years and at loan-to-value ratios of between 50 percent and 60 percent. It is understood that the firm is looking to raise up to €500 million from European institutional investors.

“Our main strategy is to be focused on relative value. So, we’re not saying we want this much in offices and that much in retail, we look at the whole landscape and say, ‘where do we think the value of this proposition is best’.”

He added: “And that is really, for us, an evolution to bring that to a wider client base. Clearly on separate accounts, you need pretty big investments to run a separate account and with a fund, you could open that up to smaller investors. So, it’s more to do with that than to say ‘this is the right time in the cycle’, even though I think on the deployment side, it is the right time in the cycle as well.”

Mid-sized deals

Nobel said that although the firm has built a loan book worth €1 billion through separate accounts previously, this would be too big of a raise for this fund, explaining since closed-ended funds have an investment period that they’d have to abide by, a large sum of equity would rush the manager to deploy. In some cases, it could mean being forced to do large transactions – going against its strategy of targeting mid-sized deals.

“Because of the closed ended funds cycle, you’d have to push the money out at a certain time. That’s not what we want to do. We want to say ‘we have capital available, and we have more than enough opportunities to invest it’, and we’ll be very selective between those [investments],” he added.

The firm did not disclose the specific returns it will be looking to attain, but Nobel said: “The difficulty is finding that balance between what is the right leverage for an investment plan versus what is the cost of that and the affordability of debt, with rates being as high as they are, [this] is potentially an issue.

“So, we’ve done things at 4 percent all in, which sounded attractive when rates were low. Now we’ve done stuff that is 8 percent, 9 percent all in. So, margins are between 300 [basis points] and 600 [basis points] basically, it’s a pretty wide range. But it feels like a good place to be if you are an institutional investor, and you have capital to deploy in the space to lock that up for three, four or five years and get that sort of return seems pretty attractive at senior level leverage,” he added.