With a greater number and broader range of lenders seeking opportunities in Europe, the choice for borrowers can be baffling. Andy Thomson meets senior executives at Laxfield Capital to find out more about how it brings together those in need of finance with those providing it.
Laxfield’s Capital’s business model is essentially about navigating an increasingly complex world on behalf of its clients – including identifying the growing sources of real estate financing, the borrowers that need capital, and then trying to make perfect matches between them.
Adam Slater, co-founder and managing director, gives a strong indication of the scale of the opportunity when he says: “Real estate is so much more global than ever before. The roster of borrowers and lenders is ten times as big as it was five years ago.”
With a mischievous shared sense of humour, Slater and fellow co-founder Emma Huepfl make as good a match as the borrowers and lenders they bring together. Their business partnership goes back more than 20 years to 1995 when they were recruited to GE Capital to start a structured lending programme.
Two years later they formed their first business together, Halkyn Capital, which was exclusively mandated by Württemberger Hypo at a time when German mortgage banks were just starting to benefit from new legislation which made it easier for them to target opportunities in the UK market. Halkyn helped its client to originate and structure loans, assisting with their execution and subsequent management.
New business, new capital
The single-client partnership remained intact for 12 years until 2007 when Württemberger Hypo was acquired by Hypo Real Estate, which had a large London office and no need to outsource to Halkyn. So Slater and Huepfl set up a new business, Laxfield Capital, “amid the crisis” with the aim of working with new capital entering the UK market to take advantage of the opportunity as banks carried out deleveraging programmes.
Launching as it did amid market turmoil, Huepfl insists that the new business benefitted from Halkyn’s track record of having guided a risk-averse client through what had been – prior to the Crisis – a hot market. “We demonstrated that we could look after capital carefully and not lose money when the cycle turned,” she says. By 2007, the average loan-to-value (LTV) in Württemberger Hypo’s portfolio was a very modest 47 percent. “We were able to deliver a profit without taking high risk,” she adds.
The steadying rudder for Laxfield, as the macroeconomic storms raged around it, was the prospect of new capital coming in from outside Europe to fill the gap that was opening up as many domestic lenders imploded. “It was difficult to see where the market was going but we knew that a difficult market would present opportunities,” reflects Huepfl. “We connected with the new money. For example we went to the US and reintroduced ourselves to life companies we had done business with in the US via our German client that were now looking at the UK.”
Since then, Laxfield has helped three US life companies to get access to the UK market, “matching capital to needs”. It is also working with capital from other parts of the globe, such as sovereign wealth funds and Asian banks, and is “constantly talking to new debt investors who want UK or European exposure,” says Huepfl.
Alexandra Lanni, who had previously worked in European real estate lending at Lloyds Bank of Scotland, joined Laxfield in 2011. Since then, she has closed more than £1.2 billion of lending transactions covering deals in the residential, office, hotel and student accommodation sectors – helping new lenders seeking local partners as they transition to the UK market, and latterly debt advisory clients.
Lanni, who became head of transactions three years ago and a co-principal earlier this year, makes the point that Laxfield is both narrow and broad – narrow in the sense that what it does is “very specific to real estate debt, and not many people are”, and broad in the sense that it undertakes a wide range of activities.
“We are not attached to one institution so we work across a variety of lending structures and asset classes and borrowers,” she says. “There’s a real feeling of operating across the whole of the real estate financing market.”
Indeed, aside from Laxfield Capital and its objective of working alongside providers of loans entering (or wishing to enter) the UK and European markets, there are no fewer than four other strands to the business.
The most recent of these, Laxfield National, was established in August last year to target the smaller loans market of £1 million to £30 million, originating and managing loans on behalf of global institutional investors. The business, which in the last six months has brought on board Bryan Hawkins from RBS and Sumeer Bose from Nationwide, has so far completed 25 deals totalling £65.5 million.
So why was there perceived to be room in the market for a business of this type? “Currently there is less competition in the smaller loan market, so returns to lenders are attractive whilst borrowers are happy to pay for reliable delivery,” says Slater.
Lanni says the business identified a gap in which the level of attention and thoroughness associated with the larger loan market can be brought to the smaller end. “Borrowers say they want a more efficient process for smaller tickets,” she says. “It’s not just about box ticking, you need to understand the risks of those loans. We take bigger deal underwriting to smaller tickets and assess the merits of each transaction. Others don’t have the time and resources to do that.”
Finding the ‘niche pockets’
In addition the firm has a borrower-focused business, Laxfield Debt Advisory (LDA), which was launched in April last year, initially as a collaboration with JCRA, the financial risk management consultancy. The business, which is now growing strongly in its own right, is designed to help borrowers make the right financing choices as sources of lending proliferate and terms change quickly. Laxfield is keen to stress that this unit is separate from the lending side and does not take fees from lenders.
“The market has changed so much,” says Slater, capturing the rationale for LDA. “There was a much tighter pool of lenders pre-Crisis and there’s now a requirement to understand where the niche pockets of capital are. No two deals are the same, and the need for advice has grown much bigger.”
“Even if you know all the lenders, their terms change constantly. That can happen in six weeks as it has already this year,” points out Huepfl. “We can help people quickly get to the right capital and the right pricing. We know whether a particular term is an absolute requirement, a ‘nice to have’, or something that the lender doesn’t really need. We understand the capital – whether it’s balance sheet, whether it needs to be syndicated, whether it’s a good match for a long-term strategy etc. The cheapest offer may not necessarily be the best.”
“Non-resident borrowers often want to bring with them lenders from their local markets,” adds Slater. “But we point out to them that London is a very big financing market and the lenders they know best may not be offering the best terms.”
As well as its knowledge of the variety of financing sources available, Slater says the firm also tries hard to be lender-friendly. “We try to make sure that when we run a process, the information is in a form that’s easy to digest. We explain why we want the deal to look like this and why we want this particular structure. It should then be easy for a busy lender to underwrite.”
“It’s important to engage well the first time,” adds Huepfl. “We want lenders to come out of it with a feeling that they have been well treated and we haven’t abused their time.”
Related to the LDA business is Laxfield Asset Management, which services loans originating from the lending and borrower advisory activities. Asset Management’s roles include full servicing as well as relationship management, covenant compliance and portfolio reporting. The unit manages more than £1 billion of loan assets.
Filling the data gap
Rounding out the business lines is Laxfield Analytics, which compiles data gathered from finance requests – which, while remaining anonymous, is used in aggregate to produce the Laxfield CRE Barometer reports. The Barometer – which is made publicly available – charts lender activity and appetite, pricing, asset-specific debt information and borrower/lender relationships.
It was in 2012 that Laxfield began collecting the information for the Barometer, a time when the firm was keen to give new lenders to the UK more information given that the market was notoriously opaque. While De Montfort University’s UK Commercial Property Lending report tracked the market retrospectively, Laxfield also wanted to look forward and make predictions about the future shape of the market.
“We counted £25 billion of loan requests so we had a good initial pool of information,” reflects Huepfl. “We now have more than £80 billion and release the Barometer every six months and it has been very well received. There are broad reference points and it’s not too complicated.”
Having decided to see what else it could do with the information at its fingertips, Laxfield recently launched DebtTrack, a database which contains in-depth information on particular deals and can provide recent comparators for new loans. In the words of Huepfl: “Based on the last ten loans of this type, we can say ‘here’s what you can expect’.”
“Other markets are much more open and public than ours,” acknowledges Slater. “Debt is rather private and opaque so the kind of information we have is valuable to our clients.”
What lies ahead
Conversation turns to current market conditions and what can be expected as 2016 unfolds. Most views expressed by market practitioners these days appear to indicate how unpredictable the current environment is – some firmly believing that the high levels of activity seen last year will continue unabated, others believing that a more cautious approach is inevitable.
Lanni also senses that different conclusions are being reached. “Some are carrying on with business as usual and think it’s a great time to be borrowing or doing a refinancing; some are pausing a little, which is mainly on the investment side and is to do with things like [the possibility of] Brexit and stock market volatility; others believe that, because some investors are on a go-slow, it’s a good time to invest because there is reduced competition to acquire assets.”
Slater adds that pricing assets is becoming more difficult currently and spreads are getting wider. But he also thinks that, despite a movement towards the high yield end of the market, “the return on a conservatively structured loan is still very good”.
“And increasingly people are seeing that you don’t have to be a bank to be a lender,” adds Lanni.
That sounds like a positive outlook for Laxfield’s business. Despite his assertion that there is a lot of hard work involved in educating people about the nature of Europe’s financing markets, Slater also points to a healthy future.
“At the end of 2016, the interest rate will still be low, there will be good availability of capital and borrowers will be reaching out to a variety of lenders,” he says. That being the case, you can also expect the Laxfield team to continue keeping themselves busy.