Opportunity in lending for cash-rich funds

By Steve Johnson
The retrenchment by the global banking sector is throwing up “extraordinary opportunities” for cash-rich institutional investors in markets such as private equity, real estate and debt, according to industry insiders.
Marcel Erni, chief investment officer of Partners Group, a Swiss alternative investment house, said investors were able to generate returns of 10-18 per cent by investing in debt instruments such as commercial real estate mortgages, in excess of typical equity returns.
Likewise, returns on mezzanine debt, a medium-risk slice of the leveraged loan market, are said to be at least 300-500 basis points higher than their long-term average.
“For those with capability and access to deal flow, extraordinary returns are possible,” said Mr Erni. “The demand for private capital in the world that we live in will go up because banks and the financial system just lost a lot of its financing capability and deleveraging will continue to be the issue over the next few years.
funds will come in and take a role that has, in the past, been provided by banks. Banks will still be the largest lenders but there will be a gap that will need to be filled and I think private funds will fill it.”
Robert Little, head of the real estate finance group at Babson Capital Management, a Massachusetts-based fixed income and alternatives specialist, added: “This is a tremendous time to be a lender.
“The spreads [over Treasuries] are the widest I have seen in my 20-plus year career. We think this is the best lending we will do in our entire careers.”
Partners Group believed some of the most lucrative opportunities lie in commercial property, where an average of $280bn (£167bn, €195bn) of mortgage debt will need to be re-financed in the US every year until 2013, with a further £47bn of mortgages due in the UK in each of the next five years, figures it described as “staggering”.
“The real estate debt market is going to be fantastic. There is less debt around so supply and demand will work for you,” said Mr Erni. “Debt is a sweet spot.”
Martin Stringfellow, managing partner at Indigo Capital, a London and Paris-based mezzanine debt specialist, said returns in his field were at their highest level since the early 1990s, with interest rates of 10 to 12 per cent and expected annualised returns of about 20 per cent when likely returns from equity “kickers” are included.
“Mezzanine is more in demand. There has been a massive reduction in availability of bank debt for buy-outs and similar transactions,” said Mr Stringfellow, which he attributed to a retreat by complex loan funds, as well as the banks.
Mr Little saw “a host of very good opportunities”, with forecast rates of return at “historically” high levels, despite more conservative loan-to-value levels helping reduce riskiness of lending.
“Institutional real estate investors have always thought of real estate equity, but now real estate lending is as attractive as equity yields,” he argued.
Mr Little forecast this golden period would last a further 18-24 months, by when banks may have rebuilt their balance sheets and the comatose securitisation market is likely to have restarted.
Mr Erni added: “Investors are slowly beginning to realise that the scarcity of capital represents an attractive opportunity for cash-rich investors. Over the next two to three years deleveraging will provide a great opportunity.”
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