ActivumSG founder Saul Goldstein recently had the pleasure of speaking on the panel at the PropertyEU breakfast in London on distressed opportunities in Europe. In case you missed it, we tweeted our top 5 takeaways from the event:
- Distressed Opp´s: Select assets will come available but more a slow trickle than waterfall. Next 3-5 years will see small scale deals.
- NPLs: given deluge of new entrants, too competitive, costs too high; need a lot of capital to buy effectively
- While forced sales by banks on the rise, 2012 will not be the year where “pretend and extend” are over
- You find opportunity by looking where no one else is looking
- Banks still a mess; will only finance cookie cutter assets, which makes exiting existing investment difficult as no refinancing available
The sixth, bonus takeaway was the answer to the €500 million question, i.e., given €500 million today, where would the panellists invest. The overriding answer seemed to indicate that the opportunity lies in… (drumroll)….lending! That is, given the current distressed state of the banking sector through Germany and the rest of Europe, with its increasing regulation, forced divestiture of assets and never-ending Eurozone crisis, the banks have all but stopped lending to anything other than cookie cutter core asset deals with a 60% LTV. This has led to the huge and much talked about funding gap, which DTZ estimates at €140 billion in Europe, including €20 billion in Germany alone. It is therefore no surprise that, according to a recent report by Prequin, there are at present 15 Europe-focused distressed debt funds on the road collectively targeting €7.2bn in capital commitments. However, only a handful has actually managed to raise any money.
All this has reminded me of those simple words from the wise Yoda, Jedi Master:
“Try not. Do or do not. There is no try.”
While everyone else seems to be trying to do it or talking about it or still raising mezzanine funds, Activum is actually already doing it. A few months ago, we closed our first mezzanine loan to a development in Frankfurt called “Material Arts”. Activum provided a well-known Frankfurt developer with a mezzanine loan to kick-start this project into high gear. The whole closing process took only a few weeks, allowing the developer to keep his project rolling. This is a classic example of the market´s growing need for additional capital beyond the traditional senior debt and Activum´s flexible approach to financing projects.
While we do predict more and more of these opportunities arising, mezzanine funding is not the cure all, suffering from the Goldilocks problem, i.e, the deal, loan size, timing and returns cannot be too big or too small, but just right for the size of the fund. Unlike Goldilocks, a fund does not have the benefit of trying out different deals before finding the one that´s just right. You have to get it right the first time, which is where skill and expertise and local market knowledge come in hand.