Forum Partners sets sights on European distressed debt

Opportunity fund manager raising capital to buy large non-performing real estate loan portfolios with £200m-£250m of equity per deal

Forum Partners is raising capital to target the growing number of distressed European property loan portfolios coming out of banks.

Industry sources said the London and US-based opportunity fund manager had started talks with several large investors about forming a club to buy large loan-to-own portfolios that might typically require £200m-£250m of equity per deal.

One of its banks, UniCredit, sold an industrial portfolio to Hansteen (see March 2010 issue) and the fund management platform went to Jos Short and Andrew Thornton’s Internos Real Investors for the nominal sum of €2 and €7m working capital in December 2009.

Landmark Loan – €27.70m senior and €11.20m mezzanine outstanding, as of Jan 2011 Kenmore Property Group, the former Edinburgh-based European property investor with a €1bn portfolio, bought a 14-strong office portfolio in the Netherlands for €135m, from White Estate Investments’ MK Capital fund in April 2007.

The 57,745m2 Landmark portfolio, which comprised properties mainly in Amsterdam, Utrecht, Breda and Amersfoort, was financed with a five-year, €114.5m whole loan from Lehman Brothers, set to mature in July 2012. Lehman syndicated the majority of the senior loan but €27.70m of it was transferred into Excalibur, along with an €8m mezzanine loan.

The senior loan was priced at 5.47%, and the mezzanine loan at all-in rate of 12%. The outstanding mezzanine loan has risen to €11.20m, because of successive shortfalls in interest payments. Only one asset from the portfolio has been sold. In October, the portfolio had a 23.9% vacancy rate and provided annual rent totalling €7.36m.

One source said Forum believed it had the necessary skills to price and manage out non-performing real estate loans and could make an ideal partner for equity looking to invest in scale. Forum’s strategy has been acquiring stakes in sector specialists, mainly in the UK and Germany, and one of its key investments was in loan servicer Crown Mortgage Management, acquired through the European Realty Income Fund III, which was raised in 2008. Crown is a European loan servicer that also co-invests in NPLs.

In 2010, Forum tried to buy Credit Suisse’s last book of European property loans, but was beaten by Apollo. However, Credit Suisse kept a 49% interest in the book, which had a notional value of $1.9bn, and instead the bank’s Rob Weinberg, Ryan Pappas and Rogier Hetterschijt joined Forum with a contract to represent Credit Suisse in managing out the positions.

Russell Platt, co-founder and managing director of Forum, said he could not comment. However, he said Fund III “has committed all of the €450m we raised to a portfolio of companies. In many cases we are still making the underlying investments and that process will continue for at least the rest of this year.”

Besides Crown, Platt’s team invested in UK retail via a stake in NewRiver acquired through a rights issue when Morgan Stanley Real Estate Investors withdrew. The fund was also a cornerstone investor in Duet’s European mezzanine fund.

The band of investors with their sights set on NPL property portfolios coming out of banks is growing fast. One American private equity fund manager said: “Everyone understands that the big story for the next five years will be European distressed debt; the US is recovering and the opportunities there look less intriguing than what’s happening here.”

The intense pressure on European banks to delever and shrink has spread rapidly since last summer from earlier casualties like the state-owned UK and Irish banks, and more portfolios are expected to come on the market imminently. The next to come out of Ireland is expected to be the £6.5bn CHL business of Irish Permanent, which is substantially UK buy-to-let mortgages.

The most recent sales are Lloyds’ Royal portfolio to Lone Star – which Forum is rumoured to have bid on with Colony Capital – while Euro-hypo has agreed to sell its remaining $300m US book of performing and non-performing debt  to Blackstone. CoStar reported last week that Lone Star also bought 50% of the Lehman Brothers loans, packaged in the €1.8bn Excalibur collateralised debt obligation, from the Bundesbank