Apollo launches European property debt drive(2)

Apollo Real Estate has plugged a gap in its European property coverage by acquiring a specialist debt company in London and now plans to raise a $1 billion fund.

Apollo Real Estate Advisors is setting up a debt division in Europe in hopes of buying tranches of debt from distressed sellers and also providing property finance to borrowers.

The US firm, whose European business is led by William Benjamin, has acquired a debt business based in London and is in the process of raising up to $1 billion (€640 million) in equity for a fund.

The business plan is the similar to the US where there is also a big need for mezzanine finance and attractive opportunities to buy existing debt. Before the European vehicle is raised, the firm has access to $200 million of equity from its US debt fund.

Though Apollo has been investing directly in real estate in Europe for years it has a gap in property debt expertise. In order to fill that gap, it has acquired Stoneleigh Capital to run the operation in Europe. The company was founded by David Ferguson, who along with the rest of the Stoneleigh team, has moved to Apollo’s European headquarters in London. Ferguson is a former investment professional at Fortress Investment Group who left to set up Stoneleigh in joint venture with CDP, the Canadian pension fund. The firm’s Richard Williams, Julien Roy-Decary and Felicity Healey have also joined Apollo.

Ferguson said in a statement: “This is a strong market for us with huge opportunity. We have the debt origination, structuring and execution capability and Apollo has the real estate investment and asset management expertise in Europe and a complimentary real estate debt business in the US. Together we have the platform to execute our business plan.”

He added the firm had already identified a number of “robust” opportunities in Europe.

In an article in the Financial Times, Benjamin pointed out that debt sitting on a bank’s balance sheet can trade at large discounts, even for good quality buildings. The firm estimates there is a €30 billion to 40 billion “overhang” of credit that banks would have been able to securitize prior to the credit crunch.

Private equity real estate firms have become increasingly focussed on debt vehicles since September. This is not only because the returns on offer are attractive but because they are struggling to find direct real estate opportunities or they are simply waiting on the sidelines until attractive opportunities emerge. In Europe, JER Partners – like Apollo, a US firm with a strong track record and history in debt investments – is also known to be considering a debt vehicle.

In the US, firms specialising in debt have been increasing their fund size such as New York-based Trilyn, Investcorp and Bank of Scotland, which raised $110 million for TriLyn-Investcorp Mezzanine Parters I last year.

Apollo’s debt business in the US, Apollo Real Estate Finance Corporation, launched a follow-up fund in 2006 to Apollo-GMAC Real Estate Mezzanine as it geared up for opportunities. It hired John Beaman, the former head of CMBS trading at Lehman Brothers earlier in the year.