Debt strategy is a private matter for Urban Exposure

Urban Exposure is nearing a closing for a private debt fund of around £450m, following its pulled initial public offering in July.

The London and south east residential lending specialist cited “the prevailing IPO backdrop” as its reason for aborting its flotation, but Real Estate Capital understands that the targeted investors instead showed a strong interest in committing equity to a private vehicle.

The listed vehicle would have been externally managed, with a board including Urban Exposure chairman Ravi Takhar and chief executive Randeesh Sandhu. Specialist credit private equity house EJF Capital had committed £75m to the proposed flotation.

Having undertaken promotion for a listing, Urban Exposure appears to have garnered support for a private vehicle more quickly than expected. It is understood that the fund could exceed the initial £500m IPO target, with investors willing to commit more capital to a vehicle that doesn’t carry the rigours and bureaucracy of a listed company.

The initial decision to opt for a public vehicle rather than a private fund was taken to minimise the time needed to raise capital, which had been expected to take between 18 to 24 months. This was an important factor, given that the company has £3bn of deals in the pipeline, £858m of which were agreed on an exclusive basis. Having adequate scale, whether public or private, was considered to be important for liquidity. The IPO had targeted US and Londonbased institutions, private equity firms and hedge funds. It was scheduled for mid summer, an unorthodox time given that some investors were away on holiday. Moreover, other IPOs in the preceding months, real estate and otherwise, meant that investors were close to saturation point.

Drawbacks in going public

Some investors were also understood to be wary of committing to an externally managed vehicle and reluctant to buy into a blind pool with no tangible assets, despite the pipeline of deals. Some also saw the transparency necessary for listing as a drawback, since terms and deals would have to be made public. The fund is expected to follow the same investment strategy as the proposed listed company: providing mainly £75m-plus residential development loans on schemes with end values below £1,000/sq ft, at an average 60% loan-to-estimated end value.

It will provide senior and mezzanine loans, as well as entering profit sharing agreements and is targeting a 14% overall rate of return. The fund is likely to have at least a seven-year life because of the length of time capital will be tied up in the loans provided.

EY, Urban Exposure’s independent financial adviser on the proposed flotation, which worked alongside Deutsche Bank as its bookrunner, is advising the company on the fund’s structure.

The fund is expected to undertake deals similar to those traditionally arranged by Urban Exposure. These used capital from US funds specialising in debt investment and were partnered with the likes of LaSalle Investment Management, Starwood Capital and Topland Group.

In February, for example, Urban Exposure and Topland Group provided a £25m loan for the development of Cathedral Group’s Deptford Project in south-east London. The 121 flats at the scheme have been bought by Hong Kong-based investor IP Global.

The London residential market is beginning to cool, so if Urban Exposure succeeds in raising its fund, it will be a sign that investors are seriously interested in funding new housing in the capital. ■