Nunzio Laurenziello, head of debt investments at Generali Real Estate, likes the challenge of a fresh start.

In May 2018, he was hired by the property asset management arm of the Italian insurer to launch its first commercial real estate debt platform. The fact Generali is already a huge presence in European real estate equity markets with €30 billion of assets under management, as well as the potential size of the debt vehicle, which has already raised €1 billion from the group’s insurance companies, made the task even more enticing.

Laurenziello started talking to Aldo Mazzocco and Alberto Agazzi, chief executives of Generali Real Estate and its fund management business respectively, about the vehicle a year-and-a-half ago. “I was very excited about this challenging new project. For this reason, I decided to move from the investment banking sector to asset management.”

His previous job was at Leonardo & Co, a Swiss investment banking subsidiary of Italy’s Gruppo Banca Leonardo that was sold to US peer Houlihan Lokey back in 2015, where he had been for 12 years. “At the bank, where I was involved in many real estate transactions on the equity and debt side, I saw all the stages from its set-up to the sale. Out of all them, the start-up period was the most exciting for me. I like starting from scratch.”

Dedicated ambition

Generali is not quite starting from scratch, as it has lent against property on an opportunistic basis. However, the creation of a dedicated property debt platform signals its ambitions in the market.

The launch of the strategy is intended to diversify the insurer’s investment strategy and appeal to investors with different risk-return requirements than those in the real estate equity market.

Laurenziello’s goal is to help Generali to achieve in the region of €3 billion of exposure to commercial real estate debt within the next three years. It will focus on senior lending, although as much as 25 percent of the fund can be allocated to higher yielding loans.

The initiative began in May, with the launch of a Luxembourg-based vehicle, Generali Real Estate Debt Investment Fund. The fund will be opened to external investors in the near future, with the aim of raising an additional €500 million in the next two years.

In May, Real Estate Capital’s sister publication PERE reported that Generali would launch nine property funds this year, including this vehicle, in a move that will see the firm increase its share of third-party capital from around 6 percent to 10-15 percent over the next three years.

“In recent months we have noticed strong demand for real estate credit strategies, especially from insurance companies and pension funds seeking stable and recurrent returns but without the capacity to launch a dedicated commercial real estate debt platform on their own,” Laurenziello says.

For such investors, property debt offers fixed income, with the added bonus of the borrower’s equity stake in investments cushioning potential losses. For Generali, he adds, external fundraising boosts the scale of the platform, making it more visible in the market.

“There is a mix of reasons to be open to third parties. Besides the importance of having a large platform to achieve visibility, we would need higher equity commitments to be able to deploy capital in loan tickets with a relevant size, where we think there are more opportunities for deals,” Laurenziello argues. “Obviously, we are an asset manager and one of our targets is to increase income through fees, so opening to third-party investors would allow us to deploy additional capital and simultaneously increase income.”

Generali is following another large European insurer in opening its strategy to external investors. Allianz Real Estate, the property business of German insurance company, launched a centralised property debt platform in July 2018 and is raising third-party capital in addition to €1 billion raised internally.

“There has never been a better time to be on the senior lending for an insurance company, because the banks don’t have balance sheets for this anymore. For insurance companies, it’s a way to match long-term liabilities with long term assets,” François Trausch, chief executive of Allianz Real Estate, said in June at the PERE Europe Summit.

Generali’s debut credit fund in numbers

€1bn Capital raised from the group’s insurance companies

€500m Third-party fundraising target within the next two years

2-2.5% Targeted return

25% Maximum capital allocation to mezzanine and junior debt

€400m Deployment target by the end of 2019

Window of opportunity

Since the global financial crisis, non-bank lenders have taken advantage of the market opportunity created by the banking sector’s need to de-lever due to tighter regulation. Consequently, NBLs’ share of the European real estate lending market has steadily increased this decade. In the UK, for instance, Cass Business School data show alternative lenders accounted for 26 percent of the market in 2018, up from 9 percent in 2012.

“Insurance companies like Generali are aware of the market opportunity created by the banking regulatory restrictions on lending against property,” Laurenziello says. “In Europe, more than €500 billion in commercial real estate debt is expected to mature in the next four years.” He adds traditional bank lenders will not have the capacity to refinance it all: “This shifting dynamic creates a big window of opportunity for alternative lenders.”

Insurers and pension funds have typically focused their investments on conventional bonds, but with yields low due to the European Central Bank’s measures to stimulate the eurozone since the financial crisis, real estate debt has become an attractive alternative in their hunt for yield. Solvency II rules for insurers, which include relatively lenient capital treatment for investments in real estate loans, are also driving demand.

“We aim to offer a return aligned with targeted returns for other European senior debt vehicles. Insurance companies and other types of institutional investors are seeking this type of return, which offers a premium over other fixed income products,” Laurenziello argues. Targeted returns for similar strategies are in the region of 2-2.5 percent.

Generali will focus on lending against core, core-plus and value-add properties through the fund, across a range of assets, including office, logistics, retail and student accommodation.

Debt appeal

Laurenziello argues private real estate debt’s appeal to investors is growing stronger the further we are into this prolonged cycle. “For those investors seeking to reduce volatility, investing in senior property debt is probably the best proposition. It offers lower returns than equity, but they are very stable.”

Investing in senior debt is a defensive strategy, he adds: “Through our fund, we will invest mostly in commercial real estate loans with 60 percent loan-to-value. This means an equity buffer of 40 percent that would absorb the first loss in a falling market.”

Generali has already deployed €180 million across four deals since May. Swift deployment will be crucial if the insurer is to reach its goal of a €3 billion exposure to commercial real estate debt in the next three years, Laurenziello says.

The company’s presence in the real estate equity market means it is well known to many European real estate professionals. One continental European debt fund manager says the firm’s entrance into the debt space should be welcomed: “Competition creates efficiency in the market. It forces us to do a better job and differentiate from each other.”

Another, however, argues it will be challenging for the new entrant to raise capital from external investors and deploy it quickly, due to a lack of track record in property debt. “It’s going to take some time,” he says.

Laurenziello argues the firm’s overall real estate track record will help it: “There are challenges in fundraising, but our competitive advantage is our ability to analyse the underlying asset.”

With such a large real estate equity portfolio, Laurenziello argues the firm’s knowledge and longstanding relationships in the industry will help it to source deals across Europe. Real estate debt funds can be deployed faster than equity funds, insists Laurenziello, in part due to the option of participating in deals in the syndicated property loans market: “Our equity track record is a guarantee of reliability, and can help us speed up the process of becoming one of the largest players in the commercial real estate debt market.”

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