Fundraising for Distressed CRE is Skyrocketing

BOSTON and NEW YORK—Private lending and distressed debt platform SKW Funding and Bain Capital Credit recently formed a joint venture to target distressed commercial real estate paper, namely sub- and non-performing notes. The joint venture will target $500 million of acquisitions over the next two-and-a-half years.

The joint venture has already made its first investment—a $27 million portfolio of four non-performing notes secured by 652 garden-style apartment units in San Antonio, Texas.

The joint venture will seek opportunities nationally, with a focus on acquisitions in the greater New York City market. SKW Funding and Bain Capital Credit will also target special situation loan originations including mezzanine and preferred equity investments.

SKW Funding is led by Daniel Wrublin and Andrew Wrublin of Dalan Management, and Ayush Kapahi and Jerry Swartz of HKS Real Estate Advisors. Bain Capital Credit is a global credit specialist with $41 billion in assets under management.

$8B and Counting

The SKW-Bain Capital Credit JV is not the only fund targeting distressed commercial real estate. Indeed, in the first quarter of 2019 alone, funds planning to invest in troubled property assets raised $8 billion, according to Preqin figures cited in the Financial Times. They raised less than $1 billion last year and $3.3 billion in 2017. In 2019, funds targeting distressed real estate raised $9.8 billion, but a relatively benign market didn’t offer up many opportunities to deploy it, Tom Carr, head of real estate at Preqin tells the Financial Times.

The implication of this new wave of fundraising, of course, is that private equity sees troubled times ahead for CRE and is gathering powder for the bargains they expect they will be able to snap up.

In some cases, such as with SKW and Bain Capital Credit, the funds are targeting narrow opportunities. Ban Capital Credit is seeing “idiosyncratic, borrower-driven distressed situations and signs of late-cycle lender fatigue that we believe will lead to increased opportunities in non-performing loans,” said Jeff Robinson, a managing director and global head of Bain Capital Credit’s Distressed and Special Situations Group.

In other strategies, private equity is gathering funds to target certain asset classes, such as retail, or certain markets where real estate pricing has skyrocketed or other developments have occurred that may lead to distressed opportunities. Again, SWK-Bain Capital Credit’s JV is an illustration.

“With the slowdown in transaction volume and the recent rent law changes in New York City, we see this as an ideal time to provide solutions to borrowers looking for structured capital, and to lenders looking to sell off their assets/loans due to market conditions and regulatory pressure,” Kapahi said in prepared remarks.

Some funds, such as Angelo, Gordon & Co.’s $2.5 billion AG Realty Value Fund X, will target a broader range of assets such offices, rented homes and retail property.

Eager Investors

Another funds, such as the Miami-based private equity firm Safe Harbor Equity, are expanding their fundraising goals. Its distressed CRE debt fund launched with $100 million as its goal and recently scaled up to $200 million after founder Ralph Serrano saw just how much global interest there was in the fund after European and Asian fundraising tours, according to Forbes.com.

The interest flows both ways with US institutional investors seeking out distressed opportunities overseas. As one example, earlier this year the New York State Common Retirement Fund announced six commitments totaling $1.31 billion, one of which was a $314 million commitment to Blackstone Real Estate Partners Europe VI, a commingled real estate fund managed by Blackstone Group. The fund will seek to acquire “distressed, out of favor, and undermanaged properties at attractive pricing,” according to the pension fund.

Blackstone, for its part, appears to be gearing up for further activity in this area as well. Earlier this year its global credit platform, GSO Capital Partners, hired Dan Oneglia as a senior managing director and co-head of its Distressed Investing business. Oneglia joined from Goldman Sachs where he spent 20 years, most recently serving as a portfolio manager and head of Multi-Strategy Investing in the Americas Special Situations Group. His addition to Blackstone, GSO President Dwight Scott said in prepared remarks, “is another step as we look to build upon this important part of our business.”