Duet Private Equity, part of the $2.3bn (£1.4bn) asset manager Duet Group, raised £75m of equity in March during the second close of its mezzanine debt fund, coming up short of its initial target of £100m. The investments for its European Real Estate Debt Fund came through a £50m listing of Duet Real Estate Finance.
The initial target was to raise £100m through its listing on the London Stock Exchange. A further £25m of equity was invested into the unlisted vehicle.
The second close was mainly subscribed by institutional investors from across Europe.
Dale Lattanzio, managing director of Duet Private Equity, says that he is limited as to the financial comments that he can make presently. But he is enthusiastic about plans to tap into the huge market between senior debt and equity.
Duet Real Estate Finance is one of a growing number of mezzanine debt platforms proposing to step in as a cushion between senior debt and equity, plugging the slot of between 60% and 80% of the value of properties that senior debt has effectively walked away from in the wake of the property crash.
Opportunity over several years
“This opportunity will last for several years,” says Lattanzio, who doesn’t think the banks will lend again at previous high loan-to-values.
He says there is around €1trn of debt outstanding in Europe, mostly in the UK and Germany, with half of this due for refinancing in the next three years.
For investors, the appeal is clear. The predicted returns on mezzanine refinancing are typically seen as starting at 12-15% to reflect the cost of higher risk. The internal rate of return for Duet’s master fund is “15%-plus”.
“The type of investors we have been seeing are equity income funds, private banks with high-net-worth clients, some pension funds and real estate investors, particularly real estate securities investors. They are mostly from the UK; some are from continental Europe.”
On the other side of the deal, the cost of refinancing with a mezzanine debt fund involved is often surprisingly palatable, says Rob Clayton, Duet’s 50-year-old senior investment manager.
“A lot of the loans we are seeing are falling due after having been booked five years ago when interest rates were much higher. So, actually, re-organising the capital stack doing a new senior loan at today’s interest rates, then adding in a slice of mezz, is not costing the sponsor any more money,” says Clayton.
The new wave of mezzanine funds are focused almost exclusively on lower-risk prime real estate, and Duet is no exception.
“Generally, the regions we focus on are the UK and Germany and then western Europe.” Within this, Duet is targeting a balanced portfolio, but principally looking at offices and retail.
Lattanzio adds: “This strategy, which is a high-income strategy backed by good, high-quality real estate assets, is very understandable to investors. They are beginning to read about the issues in the real estate debt market and the situation that the banks are in. They find it interesting that they can participate in a market that, otherwise, they wouldn’t have access to.”
The first two deals for the fund, which is entirely equity financed, have already been completed.
In January, Irish investment company Vico Capital secured a £107m (€120.7m) refinancing of 17 Columbus Courtyard in Canary Wharf.
The restructuring of the debt on the property, the European headquarters of Credit Suisse, was arranged by Duet through the mezzanine platform, with funding from US life insurance giant MetLife and Swiss-based private equity company the Partners Group.
Lattanzio says: “It is a good example of what we can do. MetLife provided the senior debt then we provided the mezzanine and brought in a partner as the preferred equity part of the capital structure.
“It was a Morgan Stanley-securitised loan. The senior banks were trying to facilitate some refinancing and also the sponsors had heard that we had this kind of capital available, so we came at it through multiple levels.”
Hotel-secured financing
It has also completed a €14.5m mezzanine financing secured by a portfolio of hotels in Germany owned by Blackstone Real Estate Partners.
He adds: “We go to 80% LTV and are reasonably flexible on the size of the investment we will make because we can invest not only through our fund but through our co-investors who have expressed appetite for direct yield alongside the fund.”
Clayton, a former director of structured finance at Topland and a former manager at both CIT and Industrial Bank of Japan, explains: “The banks have issues we are all aware of and they are keen to deal with people they have known for a while. We offer a wealth of experience with the banks, having both worked as bankers and with bankers, as well as having borrowed from and invested with them.”
While Lattanzio expects greater movement this year from banks looking to sell distressed assets, the situation with regards to loans is different. “We believe that it is just a more difficult process for the banks because there is very little, if any, leverage in the market for buyers of loans.”
www.duetgroup.net
