Prudential raising £1bn European RE debt fund

Prudential Real Estate Investors has started marketing European Debt Fund VI, Real Estate Capital sister publication Private Debt Investor reported.

The vehicle is targeting £1 billion and aims to achieve 12 percent net IRR. The fund held its first close in December and expects to have collected £500 million this quarter.

The vehicle targets Western Europe, with most 50 percent of its assets invested in the UK. No more than 30 percent will be dedicated to properties outside the UK and Germany.

Sectors will include office, retail, industrial and residential, with no more than 15 percent going to other real estate assets, such as hotels or healthcare. The loan-to-value will be 85 percent for secured loans.

The investment period is two years from the date of final closing, subject to a one-year extension option. The term of the fund will be five years from the end of the investment period, subject to two consecutive one-year extensions, the pitch book said.

The predecessor fund was primarily focused on the Netherlands and invested in partnership with Dutch pension manager APG. It closed on $366.7 million in capital commitments in April 2014, according to a statement from Prudential at the time.

Prudential declined to comment on Fund VI, but, describing the European real estate debt market in the pitch book, said that transaction volumes in Europe continue to grow.

“Since the global financial crisis, capital spending and development across the eurozone has been low, resulting in a deterioration in the quality of buildings, reducing the supply of high-quality accommodations for potential occupiers. This opportunity is expected to be €300 billion across Europe,” the documents said.

The firm added that the gap between property yields and senior debt costs is attractive.

“An increasing amount of legacy debt is no longer on banks’ balance sheets, having been transferred or sold on to third parties, who are actively managing it, resulting in a new wave of financing opportunities,” Prudential added.

The firm’s real estate debt platform has deployed $2.3 billion in junior debt, preferred equity and structured loans since 2010, with underlying real estate value of over $12 billion.

Prudential’s European Debt Fund I and IV posted 11.8 and 15.1 percent net IRRs, respectively. Separate accounts in the strategy also enjoyed strong returns at about 8.4 percent to 11.4 percent net. The series offers “predictable returns with little or no J-curve achieved from up-front fees, coupon and capital upside through equity-style profit participation”.

London-based managing director Andrew Radkiewicz oversees the vehicle as global head of debt strategies. Andrew Macland, managing director and head of UK, and managing director Mathew Crowther are also on the senior leadership team.

Prudential Real Estate Investors has $63.7 billion in global assets under management.