Latest commitments to Longbow’s and Duet’s debt vehicles take total contribution to mezzanine funds by institutions this year to over £1bn
Duet Private Equity and Longbow Real Estate Capital have raised a further £300m for their mezzanine debt funds. Duet raised £125m for the European Real Estate Debt fund, almost £100m from institutions, plus £26m via Duet Real Estate Finance, a Guernsey-based, London Stock Exchange-listed feeder-fund, which now has a £76m market capitalisation.
The new equity boosts the fund’s size at final closing to just over £300m. Longbow raised another £188m, closing the Longbow UK Real Estate Debt Investments II fund with total commitments of £242m. M3 Capital Partners acted as Longbow’s financial adviser.
Their success means European real estate mezzanine funds have now raised around £1.05bn from institutional investors just this year. Pramerica REI closed on £492m in May, M&G Investments reached a €343m final closing in July and LaSalle Investment Management launched its Junior Debt Fund with £150m.
A junior debt fund from Schroders, Cairn Capital and Eurohypo has yet to reach its first closing. Talks with a cornerstone investor, thought to
be Oxford Properties – the real estate arm of Canadian pension fund OMERS – have ended. Dale Lattanzio, managing director of Duet Private Equity, said his fund’s institutional investors were a mix of UK and continental pension funds and insurance companies with additional investors coming from North America.
He said the fund will be approximately 50% invested when the next deal closes. Its last deal was arranging an £80m mezzanine loan for Blackstone’s £600m Mint hotel portfolio acquisition, which involved refinancing a Lloyds loan. Deutsche Bank underwrote the £305m of senior debt, which has been syndicated. “Our ticket sizes can be meaningful,” Lattanzio said.
Longbow has a different, UK-only focus, said joint managing partner Martin Wheeler: “We’re not in the business of backing trophy assets but good secondary property; the assets in the middle. Our sweet spot is £25m, at a 50-75% loan-to value ratio, so based on assets of around £100m.”
Longbow raised £54m at first closing, £26m from multi-manager CB Richard Ellis Investors and £25m from 51%-owner Intermediate Capital Group. ICG has put in a further £25m and the fund’s institutional investors are UK and international pension funds and insurers.
Lattanzio said: “The debt world will be cut more finely as it becomes clearer how banks and insurers want to lend and to which kinds of assets – which will help define the space where mezzanine plays.” Mezzanine funds typically take an income return via a coupon and an equity participation to boost returns. The Duet and Longbow funds both target 14-15% total returns.
With volatility in markets over the summer and lower economic growth forecasts, borrowers may soon see capital values fall, eroding equity returns. But Wheeler said profit shares could improve, “because our borrowers are buying cheaper and because of income surpluses”. David Hunter, former managing director of Aberdeen’s property fund business, has joined Longbow as chairman.