Experienced ex banker assesses lending evolution in Forum Q&A with FT’s John Plender
Bill Winters is CEO of alternative asset manager and adviser Renshaw Bay, founded in 2011 in partnership with Reinet Investments and RIT Capital Partners. As former co-CEO of JP Morgan Investment Bank, he played a key role in steering the bank through the 2008 financial crisis.
What market opportunities are you seeking to exploit?
We have two sets of funds; the first is financing commercial property in Europe, primarily in creditor-friendly, northern European countries. We have funds that underwrite whole loans but retain the mezzanine tranche, targeting 10%-plus returns; we have other accounts where we manage whole loans, and we’re getting into areas of higher-risk lending as well.
We had no hesitation in piling into the commercial real estate market, which was truly dislocated and continues to be so. We didn’t see a lot of value in many other direct lending markets.
The regulators identified direct lending areas they wanted to disadvantage through capital rules on market risk and credit risk, commercial real estate and leveraged funding being the two obvious ones. They also wanted to discourage a bunch of securitised or derivative products.
That creates opportunities for people like us to take the very burdensome capital requirements off banks, allowing them to do what is profitable for them: offer customised, over-the-counter derivative products to knowledgeable counterparties.
So we have a structured finance fund that is buying secondary market assets, taking risk off the banks’ balance sheets, and we also pursue a number of speciality finance strategies with a pretty broad-based pool of credit-related capital.
How large is your balance sheet?
Between real estate and structured finance funds, we have about $2bn of capital available today and another $1bn we can call on for specific transactions.
Our real estate fund, launched in November 2011, was a seven-year fund. We have a little over a year left to invest the capital we raised. After that, any principal coming in will be returned to investors. So the average life should be about 4.5 years.
Where are the current investments distributed geographically?
Our real estate investments are focused in the UK, but with assets in Scandinavia Germany, Holland, Benelux, Ireland – and we will branch out into peripheral markets.
What’s the key to competing with giants such as AXA and Allianz?
The biggest advantage we have is that we are not as big as the AXAs and Allianzs of this world. In balance-sheet terms, they are restricted to investment grade-type credits, and increasingly, under Solvency II, they find themselves disadvantaged from holding sub-investment grade loans.
They also have relatively small teams, so want to make relatively big loans – €100m-€250m. We’re very happy in our £450m fund to make £75m loans and retain £25m.
It’s a different risk appetite. We can be more nimble; in what we buy, we’re not constrained by regulations, but by our sense of risk versus return – or what we can convince investors is appropriate risk versus return. So we don’t find ourselves competing with those guys very much.
If I’m a pension fund and I like the ‘small and nimble’ bit, how can you
persuade me you won’t become big?
By capping the size of our fund. No one thinks investing in a £3bn commercial real estate fund will get you a nimble portfolio. But it’ll be super-solid. The whole team can quit and a whole other slew of people can come behind it, because it’s absolutely self-sustaining.
At the other end of the spectrum, some people who are really small and scrappy are attracting a fair amount of money. There’s an industry of people who get a bit of premium by investing in smaller or early stage funds. It’s very hard to be in between, because it’s expensive to operate these things.
You exploit opportunities created by banks’ disfunction, but as they recapitalise and intermediation becomes more effective, will that window close, making it tougher for you?
Most of the windows open in 2009 have closed. The fundamental question is do you think Europe’s capital market will be a diverse one, with multiple sources of capital, or will it revert back to a bank market?
The US went through this transition in the 1980s and 90s and never went back to being bank-dominated. Banks are very important, but they are just one channel. Securitisation, the fund market, insurance companies and pension funds directly investing are important. That seems like a very healthy market.
It doesn’t mean you can’t get in trouble, but it means you can recover more quickly. That’s a good objective for Europe. We’re a long way from that now, although we have moved in that direction.
There were no real estate debt funds in 2007; now there are maybe 50? It’s a tiny percentage of the market. A healthy state is to have a diverse set of capital channels. I think that is where Europe will get to, but it will take a few years.
Property has been the financial system’s Achilles heel. In these days of global flows, regulatory arbitrage and sophisticated derivatives, is it possible to prevent a repeat of the last crisis?
We can, but I don’t think we will. We can avoid having a credit cycle spill over into a financial crisis. The impact of a financial crisis on the economy is many, many multiples of what the generic credit cycle is. The recovery time is far longer and the structural depletion of productivity in the economy is great.
We must try to dramatically reduce the likelihood of a real financial crisis, one that saps confidence in the financial system.
The property market is frequently at the source of this. We cannot minimise property price fluctuations and I don’t think we should try to. It’s a risk-seeking market, it’s a relatively commoditised market and like all commodities, it gets overdone. But yes, you can prevent a property or credit cycle from creeping into the financial markets.
Is shadow banking part of the answer to the problem?
I’m sure that non-bank lending is part of the answer, the problem being, how do we have consistently available, safe channels of capital distribution from savers to borrowers? Or from savers to investors?
In Europe, it’s overwhelmingly a bank channel. When that channel breaks down, as it did in 2008-10, so does the economy. To the extent that you have a diversity of channels, you have a better likelihood of surviving a downturn.
That’s partly why I’m doing what I do at Renshaw Bay. It’s a reaction to regulators’ determination to put a firewall between cyclical markets and the financial system’s soundness. Many of us focus on commercial property because it’s a regulatory disadvantaged asset class for traditional lenders. Therein lies the opportunity.
When central banks start to retreat from their unconventional measures, can we get out of this smoothly, without some interest rate spike?
I’m at the bearish end of the spectrum. I think it’s inevitable that we’re going to have real bumps in the road.
That said, I think central bankers did a masterful job. They avoided apocalypse and signalled miles in advance their intentions. Anybody who’s surprised in 2015 when the Fed raises interest rates is a fool; anybody who is surprised that Treasury 10-year rates shouldn’t go to 3.5% before they go down to 2% is also a fool. I’m not saying it will happen, but you have to be prepared for it.
Is the market pricing-in a heightened volatility? Absolutely not. That’s where I get scared. Everybody knows it will be a bumpy ride. But the strength of that conviction is only exceeded by the conviction that central bankers will ultimately get it right.
How do you position your fund for the retreat from quantitative easing in the UK and the start of QE in the Eurozone?
I fully expect interest rates in Europe will be low, or negative, at the short end of the curve, for a very long time. At the back end of this process, which I think will be in the next couple of years in the UK and further out in Europe, there will be real inflation.
The obvious way to protect against inflation is to issue floating-rate loans to borrowers that can afford to repay you in that higher interest rate environment, assuming that they are not being bailed out by higher property prices, which may or may not coincide with higher interest rates. But that’s easier said than done. Those are the things we have an eye to.
Part of the attraction of real estate financing is that the underlying properties feel like they are some kind of interest rate hedge and store of value that will perform better in a higher-inflation environment than other assets. Properly structured, that flows through to debt.