The nation’s private equity giants have marshaled a massive war chest in anticipation of the lower pricing expected to come from the COVID-19 crisis. But these equity investors are not alone. A wide range of companies and funds have also been readying themselves to invest in the distressed debt that the crisis is expected to generate. Among the billion-dollar-fund-club are big companies like Apollo Global Management and Fortress Investment Group.
On the real estate side, companies are also focusing on distressed real estate debt. Goldman Sachs recently closed a $2.75 billion fund of its own while New York’s Northwind Group launched a $220 million fund last month, and Brookfield is planning to start a $5 billion retail fund. The waters are indeed frothy. According to David Fann, Vice Chairman of the alternative investment research firm Aksia LLC, “Everybody and their sister is back in the marketplace trying to raise a distressed debt fund. We’ve been inundated with distressed ideas.”
Everybody and their sister is back in the marketplace trying to raise a distressed debt fund. We’ve been inundated with distressed ideas.
David Fann, Vice Chairman, Aksia LLC
Distressed debt investors may often be labeled vulture funds, but within commercial real estate in particular, the reality is that taking discounted positions in troubled real assets provides a particularly good opportunity to offer a vital service while strengthening the local community. This is the core of what a well-functioning real estate market is all about. In an excellent article for Global Capital, Owen Sanderson explains that servicing strategies do not need to be about shutting down businesses and sending people to bankruptcy court. For a lot of distressed debt buyers, the discounted price offered allows for more creative loan terms or even principal drawdowns that can help distressed borrowers get out from under the mountain of their obligations. “A fund that mainly buys bonds with ESG characteristics might expect returns in line with a normal bond fund, say five percent optimistically, while a fund playing in NPLs might be shooting for fifteen to twenty percent with leverage,” Mr. Sanderson wrote. “That is more than enough gap to allow for a more sedate approach to servicing, and such an approach would surely attract more capital to the market.” But even if things get hairier, there are still opportunities to bring about good for the community.
Perhaps a property’s distressed debt does sell to a new investor, and perhaps that investor does force a sale of the asset. This is bad news for the property owner, but for the community, it could be a good thing as well. Moving a commercial building from one owner, who for whatever reason was unable to stay in business, to a new owner offers a chance to reposition the asset into a more efficient, sustainable angle….