Urban Partners holds first close for sustainability-focused mezzanine fund

Velo Capital, the recently formed group’s credit arm, will target financing opportunities including ‘brown-to-green’ schemes.

Alternative credit adviser Velo Capital, which forms part of the recently launched Urban Partners group of companies, has held a €136 million first close on its fourth real estate debt fund, for which it is aiming to raise €600 million of capital.

Through the vehicle – Velo Mezzanine Credit Fund – Velo is targeting a 10 percent net internal rate of return by providing subordinate loans against developments, refurbishments and standing assets, with a focus on Germany and the Nordics.

Urban Partners was formed in May as an umbrella platform for four businesses collectively aiming to undertake impact investment in city settings. The platform is led by the bosses of NREP, the Copenhagen-headquartered real estate manager which, with €19 billion of assets under management, accounts for most of Urban Partners’ circa €20 billion of AUM. In addition to Velo, the platform houses venture capital firm 2150 and private equity investor Luma Equity.

Speaking to affiliate title PERE in May, Claus Mathisen, chief executive officer of Urban Partners, and former CEO of NREP, explained the platform was formed with the aim of improving city life for people: “Cities are super-complex ecosystems that evolve as a consequence of technology, demographics and politics. This is the narrative around why urban is a much more dynamic investment thesis than real estate on a standalone basis.”

Velo can trace its origins to NREP’s agreement in December 2021 to acquire the Germany-focused credit business of investment and advisory firm M3 Capital Partners. The business included a Munich-based team operating under the name Flins Capital Partners.

Through the VMC fund, Velo plans to finance sustainable real estate, including a focus on retrofitting assets, in line with Urban Partners’ founding aim to accelerate sustainable urban transformation, explained Emanuele Bena, managing partner of Velo Capital.

“Brown-to-green is one of the levers we can play in delivering our purpose, and one of the areas where there is a big financing gap. It is an area where traditional lenders will be even less supportive of owners because it tends to be complicated and expensive. We have in-house expertise to underwrite those projects,” he said.

Emanuele Bena, Velo Capital
Bena: Investment case for real estate credit is strong

“We are an Article 8 fund, with an ambitious green framework. So, the vast majority of our financing portfolio will have a focus on ESG. There will be features to deliver that are worked into the cost of the loan; we want to financially incentivise ambitious green business plans,” he added.

Fundraising began in December 2022, with capital so far raised from existing Urban Partners institutional investors. The €600 million final close is anticipated within the coming nine to 12 months, Bena added.

“Fundraising markets are more difficult than they used to be. There is clearly a denominator effect impacting capital availability for investors. They are also significantly more selective in what they are looking at.

“But we are getting strong feedback. The investment case for real estate credit is being supported by what is happening in the market now. I’ve been in European real estate for 20 years – I’ve never seen a market as supported as the real estate credit market today. The risk-return profile offered by this kind of investment is surprisingly attractive compared with equity.”

Bena added the 10 percent return target represents a conservative target over the life of the five-year fund. Up to 25 percent of the fund can be allocated to whole loans but the focus is mezzanine facilities.

“In our target market today, the gross return is certainly above net 10 percent. But we do not want to use this opportunity to engage in stretched underwriting standards, which became usual during the last few years of the previous cycle.”

Velo is planning to cap loans at below 80 percent loan-to-value and, the low 80s percent on a loan-to-cost basis for development. “We want counterparties that are going to put significant equity and skin in the game behind us, rather than providing developers a free option as many of our competitors did in the past.

“If we believe there is further value erosion to come, we will not go to the top of our range. We see ourselves 15-20 percent above senior LTV, which is coming up as 50-55 percent in some countries today.”

The fund will be targeted across sectors, Bena said, although residential real estate is likely to be a focus, as well as well-located city centre offices, which Velo sees as an opportunity for brown-to-green financing. He added that logistics owners are increasingly looking for non-bank financing.

Bena believes that being part of the Urban Partners platform provides benefits to Velo. “What Urban Partners provides in terms of ESG thought leadership and understanding is extremely useful for an alternative credit investor. Having real estate professionals across the countries we are active is very helpful. We don’t want to be a financial engineer – we invest in the asset, just in a different part of the capital structure.”