European debt fund’s whole loans strategy proves attractive to investors
Starwood’s £228.5m initial public offering for its European debt fund has garnered strong support from a wide range of investors, mostly institutional multi asset and wealth managers.
Starwood spent time educating investors “about our market because it was a new asset class for the exchange”, said Peter Denton, the firm’s head of European debt.
It benefited from being the first European debt fund including a whole loans strategy to be listed and expects to receive investors’ interest in supporting it in the future “now it’s listed and exists”, he added.
Denton said an IPO needed to raise about £200m to make it worthwhile. “Shareholders will not support you unless you’re a certain size; you need to have liquidity. Any less and, as a manager, it’s hard to deliver appropriate net returns.
“You have a fixed cost for running this company. The smaller you are, the bigger proportion that fixed cost is.” The listed fund, called Starwood European Real Estate Finance (SEREF), will take advantage of the widest real estate debt spreads Starwood has seen for some time.
SEREF’s strategy is to invest across the debt capital stack, including senior and mezzanine debt or whole loans at average loan-to-value ratios of 25-70%, with an 8-9% net total return target and 7% dividend yield.
Investments will be considered in institutional-quality office, retail, logistics, residential and hospitality assets across the UK and northern Europe. The latter is where it has a “good pipeline” of first deals. “We’re lending money; we’re going to be looking to close loans selectively, but rapidly now,” Denton said.
ICG-Longbow now hopes to close its senior debt fund IPO after Christmas, while Cheyne Capital’s has been postponed.