Opportunistic capital is waiting in the wings

Debt and equity managers alike are readying themselves to do business in distressed scenarios. But Europe is not delivering too many, for now.

During a May earnings call, Robert Shafir, chief executive of New York-based manager Sculptor Real Estate, formerly Och-Ziff Capital Management, spoke about the firm’s financial firepower heading into the covid-19 crisis.

“We’re in a very fortunate position to have a lot of fresh capital that we can deploy in what looks to be a pretty target-rich market,” he said, citing distressed debt among the medium-term opportunities.

This week, sister title PERE broke the news that Sculptor has closed its largest opportunistic fund yet, on $2.6 billion, of which almost 20 percent is understood to have closed since lockdowns began. The fund provides Sculptor with capital for equity and debt investments across North America and Europe.

In the US market, several private equity firms have raised opportunistic capital in response to covid-19. For example, in May, KKR closed a $4 billion credit fund – encompassing real estate – after just eight weeks of fundraising. Our data team show a range of US and European managers in market with Europe-focused opportunistic real estate equity vehicles, although several will predate this crisis.

There are clearly deals to be done in Europe. On 22 June, London-based manager Henderson Park and US investor Hines announced the acquisition of a Greek hotel portfolio, which Henderson Park founder Nick Weber described as a “solution to a distressed situation”.

Much of the opportunistic debt capital out there is in the hands of US managers and is predominantly focused on their home country, for the time being. However, in Europe, there is evidence of established debt market participants raising new capital, or fast-tracking existing programmes, for opportunistic and special situations lending strategies. Some, like LaSalle Investment Management, which raised £225 million (€245 million) in February, were already preparing for distressed scenarios, pre-pandemic.

Others, like principal investment and capital markets advisory firm Rivercrown, have launched strategies in response to covid-19. In that case, the firm is seeking low-to-medium double digit returns in situations where there is a funding gap, often combined with an element of situational distress. Rivercrown co-founder Jacob Lyons told us that, while US private equity firms are well equipped with opportunistic capital, their current focus on home turf means there is an opportunity out there for firms targeting smaller-scale situations.

However, so far, European real estate debt specialists say there have been relatively few distressed-debt-related financing deals in Europe. This crisis is still in its early days, they say, and government measures to protect businesses have staved off situations of default. While some alternative lenders have been busy providing fresh finance at higher margins in the hotel sector, for example, there is limited evidence of distressed deals taking place, for now.

The scale of the opportunity for those in control of high risk and return capital will depend on several factors, including the speed with which European economies reboot and the approach incumbent lenders take with sponsors experiencing stress. Memories of the 2007-08 crash remain fresh in peoples’ minds and many expect lenders to do all they can to avoid widespread foreclosures and messy restructurings.

It would be far healthier for the market overall if there was a limited need for borrowers to source opportunistic or special situations financing solutions. Such capital can help smooth over difficult situations where fundamentally sound sponsors and properties need immediate help. But most will want to avoid a repeat of the years following the global financial crisis, when opportunistic capital played arguably too big a role in an illiquid sector.

Given the blow covid-19 has delivered to what was a late cycle, high-priced real estate sector, situations of distress and illiquidity are inevitable. Trouble was brewing in some sectors – particularly retail – before anyone had heard of covid-19. Opportunistic capital is waiting in the wings, but many sponsors of European real estate will be hoping they will not need to turn to it.

Email the author: daniel.c@peimedia.com