Euro Bank Cuts Spell Opportunity
NEW YORK CITY—The New York Post recently
reported that European banks were planning to cut their lending volume by a
whopping US$175 billion. That spells
good news for lenders who can swoop in
and fill that gap. And that’s exactly what
Newark-based Prudential Financial Inc.
intends to do.
In an exclusive interview after Pru’s
Tuesday morning Global Economic and
Retirement Outlook briefing, David M.
Durning, senior managing director of
originations and agency lending for Pru
Mortgage Capital, told GlobeSt.com that
the firm is pushing into Europe. “The
bank pull-back is a perfect opportunity for
senior lenders to broaden their trade in
Europe. They’re a scarce commodity.”
For fixed-income investors, he contin-
ued, “it also represents a yield opportunity
versus what they could get in the United
As in the US, “some markets are more
stable than others in the Eurozone,”
observed Jack Taylor, managing director
of global real estate finance, who
explained that on the fund front, Pru has
had a footprint in Europe for years. “The
risk/return is an opportunity for many
But while the lending cutback under-
scores the dire straits of European capital
flows, it also highlights the willingness to
swallow bitter pills. As was discussed dur-
ing the briefing, the Eurozone crisis is
actually a bit more secure than it was a few
John Praveen, managing director and
chief investment strategist for Pru’s
International Investment Advisers,
pointed out that all of the factors that
drove markets in 2012 are still in play. And
with Germany committed to keeping the
Eurozone afloat, the worst might really be
over for the European capital crisis.
As the report issued by Pru stated,
“The developed world economies continue to be weighed down by a variety of
structural factors, but as time passes and
we gain greater distance from the financial crisis, we see signs of healing.” There
is the possibility, though, that “the
Eurozone crisis could intensify again.
The political progress has been slow, but
we think things are headed in the right
The Brave New World for RE Funds
A new and increasingly challenging environment is emerging within the real estate private equity funds sector. Consider the current climate. In most markets, deal flow
remains slow, largely because of continued illiquidity in the capital
markets. Fund-raising poses an enormous challenge because investors are wary of making commitments, especially to new funds. In
addition, the number of active funds is contracting and will likely
continue to do so for some time yet.
Add to that the sweeping regulatory
changes coming into effect in the US and
significant structural and cultural shift.
The good news, for those able to move beyond the old rules, is that this a period in
which funds can thrive. Lack of available bank debt means that deal flow is slowed to a
trickle outside of gateway cities in North America and northern Europe. However, this
has created new investment opportunities in the funds world.
Looming final loan maturities and broken capital structures on a large number of
assets have fueled demand for refinancing capital. Indeed, a recent survey of private
equity funds we conducted revealed that refinancing is expected to be the most
lucrative opportunity for deploying capital in 2013, followed by bank portfolios and
The sector has picked up on other innovative investment opportunities as well,
including secondary trading of positions in closed-ended funds. Not only have opportunistic investors found new investment potential in this space, but the trend could also
help restore the confidence of skittish core investors by providing flexibility.
Additionally, senior debt funds are gaining momentum, especially in markets where
bank lending for real estate is heavily restricted by regulation, like China. Raising funds,
however, is still tremendously difficult. Eighteen months appears to be the new norm for
achieving a final close.
This new environment is forcing funds to think differently about their business vis-à-vis investor relations and how they pursue deals, and it is also causing re-examination of
internal operational strategy. The pressure here is being imposed by tightening regulatory standards in the US and Europe. Alarmingly, although fund managers are facing
significant near-term compliance requirements from these directives, almost 40% of
those surveyed still did not know what business costs they would incur to meet them.
Fortunately, new solutions are emerging to help ease the process by offering ways to
improve operational efficiency and reduce costs. Increasingly, software and administrative service providers are building out platforms that are specifically designed for real
estate. Outsourcing and off-shoring back-office functions are also on the rise in the
Uncertainties still loom over the real estate private equity funds sector. In recent years,
many funds have either opted out or been forced out of the space because of them. For
those that have persevered, ongoing success in today’s changing climate is achievable,
but it will depend more now than ever on their adaptability and creativity.
By Howard Roth
(A longer version of this column originally appeared on GlobeSt.com.)
Howard Roth is Ernst & Young’s Global Real Estate Leader and a partner with Ernst & Young
LLP’s Real Estate practice. He may be reached at firstname.lastname@example.org. The views expressed
here are the author’s own.
Vital Signs...Combined Latin American GDP is expected to reach $15 trillion by 2025.—Global Information Inc.