This crisis is a test of debt funds’ mettle

Our latest ranking of Europe’s real estate debt fund managers reveals the volumes of capital raised between 2015 and 2019 inclusive. Now, these managers face the challenge of deploying it in an uncertain market.

After a decade of favourable market conditions, Europe’s real estate debt funds are dealing with their first major crisis.

The industry emerged in response to the 2007-08 global financial crisis and has since gained market share from the banks. Now, amid covid-induced turmoil across markets, these custodians of capital face their greatest test yet.

Our second annual ranking of debt fund managers – the Real Estate Capital Debt Fund 25 – will be published next week in our summer edition and online at It reveals the extent to which institutional investors have put their faith in managers of European property lending strategies.

In our inaugural edition of the ranking, in June 2019, we revealed that the 20 leading real estate debt fundraisers for European strategies had collectively raised $42.7 billion of third-party capital in the five years to the end of 2018. This time round, the ranking shows the five-year fundraising total from the top 20 increasing to $49 billion. To better reflect the array of active alternative lenders, we increased the number of managers in this year’s ranking to 25 – on aggregate, they raised almost $53 billion during the five-year period.

Alternative debt platforms have grown their presence in the market by offering sponsors quicker decisions and higher leverage than the banks, and by lending in higher-return segments in which banks have less appetite. Conditions became tougher in recent years as returns compressed and property prices peaked, and the current crisis will test whether managers took appropriate risks. They face the challenge of recovering capital already deployed, while demonstrating a reasonable approach to borrowers in difficulty.

However, the crisis also presents an opportunity for non-banks to provide liquidity where it is warranted in Europe’s property markets. Our ranking shows several managers are well-capitalised. Banks’ ability to lend may be reduced and, depending on how much credit loss the industry experiences, non-bank lenders may be encouraged to put more money to work in a repriced real estate debt market.

Although this crisis will expose those that have taken too much risk in recent years, there is reason to believe that many managers will weather the storm. Unlike in the US, where alternative lenders tend to take on leverage or enter repurchase agreements with banks, most of Europe’s debt fund managers have not borrowed to lend and are therefore not at the mercy of banks’ margin calls. Many managers have also expanded from mezzanine debt into less risky whole loan and senior products.

Alternative lenders have helped to create greater liquidity in Europe’s real estate debt market. Managers face a test of their mettle, but now is the time for them to reinforce their role in the sector.

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