M&G bullish about returns for twin junior debt vehicles

M&G Investments has said it is confident of achieving returns for its two latest junior commercial mortgage funds comparable to those of its first, despite increasing competition.

M&G completed the fund-raising for the funds last month when it closed M&G Real Estate Debt Fund III at its hard cap of £750m.

In November, the investment manager closed on £605m of capital for M&G Real Estate Debt Fund II.

Fund III invests in mezzanine property debt, at higher loan-to-value levels, and will finance assets that don’t always generate cashflow from day one. Fund II is targeting the relatively lower- risk ‘stretch senior’ portion of the capital structure.

John Barakat, M&G’s head of real estate finance, said Fund II will generate “high single digit” returns, while Fund III’s target is “double digit returns”.

The first fund, which eventually raised €343m after starting to invest in 2009, had a 12-15% target.

He added: “There has been a lot of focus on whether these funds can achieve the returns. I say, absolutely, yes. Competition is increasing and the risk-return is different but we have been encouraged by the opportunities we have been shown.”

He said there were two main reasons for this: “We’re starting to see more action from banks to aggressively deal with legacy positions, because values are better. They are more enthusiastic and there are more deals.

“Second, we are seeing larger deals where borrowers are looking for certainty and ease of execution. People are confident that we will complete and can manage larger transactions.”

M&G also has discretionary capital for senior lending and Barakat reiterated that M&G’s approach, which is to be able to offer borrowers whole loans on a blended margin as well as senior or junior, results in more opportunities to lend.

Last year, Lynn Gilbert joined Barakat’s 20-strong team as head of origination. She has worked in real estate lending for 30 years and Barakat said she had “expanded our reach” among borrowers.

M&G’s mandates for senior debt investing include ones with the in-house Prudential Insurance group and external clients such as SamPension.

The junior funds were backed by US consultancy the Townsend Group, which had over half a dozen of its clients invest.

They include European and UK corporate pension funds and US public plans, among them New Jersey Division of Investment – one of the biggest investors – and New Mexico State Investment Council.