The headlines are always the same. Just last week another asset manager that drives its business from servicing made a prediction that the volume of non-performing loans (NPLs) in 2013 will exceed €3 billion in Germany alone, and that the sum total of all real estate securitizations maturing in Germany will reach €12 billion in 2013, €60 billion in 2014, and €100 billion between now and 2016. Surely this will create a bonanza for distressed investors!


€3 billion next year alone – WOW! Those are big numbers; big enough to get everyone excited. It seems there is a new fund or investor focused on ‘distressed European real estate’ every day. A lot of these distressed funds are coming from the States ready to scoop up ‘cheap real estate’ in Europe. From where Activum sits on the ground, the view looks different.


The Activum view? Skeptical. This is more of the same. In general, the NPL business is no longer very compelling and in a slow economic environment like now it is even less compelling than before.


Those of us who started careers by investing in NPLs have a long history. In Japan in 1997 and Korea in 1998 we remember that most corporate lending was secured by real estate assets, so in many cases, the underlying real estate was high quality and the corporate had simply fallen on hard times. Most of the assets underlying the NPLs in today’s markets are non-performing for good reason. Often, these are in secondary markets and of secondary quality where understanding the nuances of the market are almost impossible when dealing with a large pool of assets needing to be priced to perfection.


A low interest rate and low growth environment like now also makes NPLs expensive. Why? The cost of capital for the banks is increasing, thereby making one think that the banks will sell the loans, but this increased cost is overwhelmed by the equity cost of the required write-down to make these loans attractive to buyers. In reality, the banks simply can’t afford to sell. The other way to look at this is to ask the question–how realistic is it to think that the bank will accept an opportunity fund’s cost of capital at 15% when the bank funds itself via cheap ECB sponsorship of less than 1%? I’ll venture a guess– not very likely. In fact, at Activum we posit that the cost of capital gap is higher now than it has ever been.


Seasoned investors have experience with NPL pools in multiple countries and continents. Most of us have followed crisis around the global for the past 20 years and in that time, this business has become a commoditized, low margin, actuarial process with little value-add. If you are reading about the opportunity in the newspaper then you probably missed the opportunity because the real money was made years ago.


It sounds like such a compelling story, though. The basic premise is that decent assets fall prey to the greediness of an over-exuberant market and sponsors simply have to leave behind valuable assets and the banks and other stakeholders with competing interests simply don’t know what to do. The reality is a complex process involving many different parties. It requires serious in-depth knowledge of the market, a clear understanding of the true value of the asset, and loads of patience. Finally, it requires a steep discount because time is money. For our time—we make money by repositioning assets, not by buying on a hope and a prayer.