The biggest private equity firms are preparing to swoop in on $500 billion to $1 trillion in distressed commercial real estate debt expected to hit the market within the next few years.
With some $1.3 trillion in commercial real estate loans expected to mature between now and 2011, private equity funds are raising capital to position themselves to buy the debt from lenders including banks, insurance companies and special servicers of commercial mortgage-backed securities.
The situation also creates a major opportunity for large buyout funds that have raised money over the past few years, but have not had been able to invest the capital due to a paucity in debt financing.
Firms that could invest in commercial real estate debt include Apollo Global Management LLC, Goldman Sachs, Blackstone Group and Cerberus Capital Management LP, industry sources say.
Currently, 105 funds are targeting a total of $65.3 billion aimed at real estate debt, according Preqin, a London-based alternative investment research firm. Among the 10 largest are three sponsored by private equity firms: Fortress, which is raising a $2 billion credit fund; Carlyle Group, raising a $3 billion fund to buy commercial real estate debt; and Lone Star Funds, raising two private equity funds with a combined target of $8 billion.
Private equity firms are aiming for the less senior, unrated slices of debt.
Banks aren't lending and so private equity firms are using their capital to buy commercial real estate debt, said Harris Smith, a managing partner of consulting firm Grant Thornton LLP.
“Private equity firms have billions to buy debt, both the debt of companies and commercial real estate debt,” Mr. Smith said.
Private equity firms are interested in buying banks to access the debt, he said.
Private equity distressed debt investment firms also are broadening their fund mandates to include real estate debt and CMBS, said Kelly DePonte, partner, Probitas Partners, a San Francisco-based private equity placement agent.
Banks, especially small and medium-sized ones, are weighed down with commercial real estate debt, some of which investors expect will be sold.
In early 2009, some savvy investors including private equity and hedge funds were buying distressed debt at 40 cents to 50 cents on the dollar, Mr. Smith said. Prices have gone up since then, but investment managers expect much more opportunity to come.
“As commercial real estate unfolds, there will be great deals,” Mr. Smith said.