In February, the debt business of property manager LaSalle Investment Management raised £225 million (€245 million) for its special situations strategy, through a segregated mandate. In addition, the company’s European lending business entered the covid-19 crisis with capital for mezzanine, whole loan, and residential development finance.
Real Estate Capital caught up with Amy Klein Aznar, LaSalle’s head of debt investments and special situations, to discuss lending market prospects during this time of crisis.
Real Estate Capital: Your European lending business began in 2010 with a special situations fund. Why did you raise fresh capital for this strategy?
Amy Klein Aznar: In 2010, we wanted to raise the most flexible capital we could, so we could invest anywhere in the capital structure – senior, mezzanine, preferred equity, joint venture equity. We did all that through our first special situations fund and we were able to achieve outsized returns in all those areas.
At the start of this year, we thought it was an interesting strategy to return to because we saw the market as late cycle and thought ‘something has to give’. We wanted flexible capital for when the adjustment came, because it is harder to raise when the adjustment has already happened. When the covid-19 crisis began, we had this capital but had not invested any of it yet.
REC: What kind of opportunities are you targeting?
AKA: We can look for recapitalisation opportunities in distressed scenarios, but we can also provide growth capital. This does not need to be just about distress – through this capital, we can invest in an interesting platform in need of finance, for example.
Hotels are interesting. Pre-covid, lots of hotels were in great shape. Now, lots have experienced a cash pinch and stress in the structure. Returns-wise, this is a risk-adjusted strategy, so there will be opportunities at the lower-end of the risk and return spectrum as well as higher. On a blended basis, returns will be in the high-teens region.
REC: Will you continue to raise capital for the strategy?
AKA: Step one is lending on behalf of our single investor, but step two will be to raise a commingled fund, probably within the next 12 months. However, the segregated mandate is large enough for now.
REC: How big an opportunity do you expect distressed deals to be across Europe?
AKA: Right now, such deals are only just starting to come through. Lenders want to be seen to be reasonable and friendly, given this situation has been caused by a pandemic and is out of peoples’ control. But there will come a point where pressure will build, and things will begin to move. The first wave will be in property like hotels. The second will come through as the impact on tenants and their businesses is felt, and that will take longer to pan out. There will be pinch points on cashflows. We will be aiming to help high quality sponsors get through the pinch point.
REC: You are also raising for your mezzanine strategy. How is that opportunity changing?
AKA: Investors have been keen to go ahead despite covid, as they see it as a good time to be investing in mezzanine debt. Investors can see there is a correction in the lending market and banks are pulling back, so there are higher margins for the same risk on offer. We are doing some mezzanine that might have been priced too keenly for us, pre-covid. There is a wide range of returns out there, but we have always had flexibly priced mezzanine.
REC: Are sponsors reducing their leverage due to market uncertainty?
AKA: We are seeing some be more conservative, but because the banks have pulled back on leverage, we can also do mezzanine at more conservative loan-to-values. So, we dial back the risk, but still make the minimum return we need. At the moment, we are more focused on the low-risk sectors, in established markets, for mezzanine lending opportunities. There is too much uncertainty out there to layer on a lot of deal risk.
REC: How do you expect investor demand to hold up?
AKA: Most investors still have a lot of liquidity, so unless they have problems in their portfolios, they have capital to invest. However, they think they should be getting more return than pre-covid for the same risk, because there is more uncertainty in the market.
REC: July interest payment dates will be challenging for many lenders. What do you think will be the impact on Europe’s non-bank lending industry?
AKA: It will be difficult for everybody, but debt funds tend to have flexibility, commercially. Most have enough liquidity to be able to deal with problems. If funds are long in shopping centres or hotels, they will face trouble, but those with a diversified portfolio should get through this. The use of leverage by debt funds has not been as prevalent in Europe as in the US, so that is less of an issue.