Managers widen the strategy for follow-on high-yield funds in 2016, reports Jane Roberts.
Fresh from a stand-out lending year in 2015, Europe’s high-yield debt fund managers have plunged into a new round of capital raising.
DRC Capital, LaSalle and Pramerica are in the market with follow-on pan-European vehicles after investing their 2014 vintage capital, while Blackstone has raced towards a first closing for a third global real estate debt fund including Europe in its remit.
With plenty of chances to provide quick acquisition finance, or refinance loans from banks wanting to be repaid, established debt fund managers have invested at an impressive pace of up to £500 million a year, on financings typically yielding 10-12 percent gross.
“We had a great year, backing some highly capable sponsors on quality real estate. We did 12 deals – one a month – and invested £360 million, a little bit up on 2014,” Amy Aznar, LaSalle Investment Management’s head of debt and special situations, says. LIM used two main buckets of capital: Real Estate Debt Strategies 2, which closed on £600 million in January 2014, and the £440m Residential Finance fund, raised in 2013-14.
Pramerica Real Estate Investors has also been cruising at this speed, says UK head Andrew Macland, who runs the five-year-old, European high-yield debt business with global head of debt Andrew Radkiewicz.
“Pramerica has invested at a rate of about £500 million per year over the past few years and expects that to continue,” says Macland. “We’ve done 60 deals altogether in our PRECap funds and an average of a deal a month in the past 18 months, ranging in size from £5 million to £135 million.”
Debt fund managers stay busy
Others are similarly busy. M&G Investments invested about £500 million in 2015 for its two junior debt funds, Real Estate Debt Funds 2 and 3. ICG-Longbow is thought to have deployed all its remaining capital for senior lending last year, while its fourth mezzanine debt fund sealed plenty of deals. In November, it said it was set to invest more than £750 million in the full year, 60 percent of that for high-yield lending.
By Q4 2015, independent fund manager DRC Capital had fully invested its 2014 vintage European Real Estate Debt Fund 2 (ERED 2).
Blackstone Real Estate Debt Strategies’ (BREDS) second fund was largely invested by Q3 last year and it began signing up investors for a third fund, including repeat investments, of $100 million each, from the Pennsylvania Public Employees Retirement System and Illinois Municipal Retirement.
For regulatory reasons, managers cannot comment on new capital raising, but their increased rate of recent investing since the previous round tells the story. With track records in European high-yield debt and demand from loyal borrowers busy in a buoyant investment market (see panel), managers need a permanent flow of cash.
They will also be seeking the most flexible capital, so they can consider the widest-possible deal range for the desired risk-adjusted-return profile. The 2014 vintage funds had already evolved their strategies from those of the first post-crisis European high-yield real estate debt vehicles, launched in 2009/2010 and styled as pure mezzanine funds, making loans behind senior debt.
More recently, high-yield debt funds have started making whole loans, underwriting senior as well as mezzanine to win business, often selling the senior and keeping the higher-yielding, higher loan-to-value tranche.
Stretched senior financings have worked especially well for borrowers seeking higher leverage and with a short time to complete, or in deals where asset management will make properties a more attractive proposition later to senior lenders – potentially a more cost-effective borrower solution.
As Europe’s property markets move through the cycle, there are more opportunities to finance ‘transitional’ assets and development. Macland says: “We’re financing asset repositionings, restructurings and development as well as stabilised investments, lending across the capital stack, including senior underwriting where appropriate, sometimes equity participations.” Debt funds are thus maintaining their new market share, even though banks are back lending in force on more vanilla deals.
The buckets of capital drawn in this fundraising round are likely to be splashed on more such complex deals. It is thought DRC Capital’s next fund will include development, transitional assets and bridging loans.
It is believed LaSalle will raise capital again for residential development, after successfully investing LaSalle Residential Finance, although these projects’ risk-return profile has changed since that fund’s launch; it now costs more to build such assets and there is more competition to lend. But sources say LIM still sees interesting deals and has built relationships with experienced borrowers.
M&G Investments is still investing for high-yield funds 2 and 3 that it closed in 2014 with a whopping £1.35 billion, but their investment periods end in 2016 and they are on course to be fully invested.
M&G will raise follow-on high-yield capital this year and is also likely to add new strategies, possibly for sector concentration or geographic expansion. A pure development fund, able to write high loan-to-cost and shorter-dated loans, is on the cards.
Last year M&G made some development loans using existing capital, partly to establish a track record. In November, it provided a £70 million, two-year, fixed-rate loan to fund four south-east England private rented residential projects by Westrock.
Other high-yield debt fund managers are working on pitch books and fund structures. Late last year, Renshaw Bay was focused on closing out its first Real Estate Finance Fund, which raised £370 million and has made 25-
30 loans over a two-and-a-half year period.
Renshaw, now owned by larger Swiss asset manager GAM, aims to raise fresh capital for real estate debt in the first half of this year.
Repeats are big part of managers’ schedule
At the CREFC Europe conference last November, speakers from DRC, LaSalle and Pramerica revealed how significant repeat business has become for maturing, high-yield debt fund businesses, accounting for up to 50 percent of lending in some cases.
Pramerica has lent to about 30 borrowers across its 60 loans, according to global head of debt Andrew Radkiewicz.
For one experienced investor client, Tribeca Holdings, Pramerica’s PRECap funds have lent on about £1 billion of prime shops, in central London, adding to existing loans or writing new ones across properties including Old Spitalfields Market, 431-451 Oxford Street and the Brompton Cross Estate in Chelsea.
The fund manager has also closed four separate financings in Manchester
and Leeds with developer Allied London, notably a £70 million debt and preferred equity package for the development of 1 Spinningfields in central Manchester, a part-speculative tower.
Borrowers, it seems, value a close relationship with lenders that understand their business, as well as speed and certainty of execution, and now it is not just banks that can boast of their relationship lending.