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EURO NEWS: Mezz kings of Europe

Prudential has tested Europe’s appetite for mezzanine debt vehicles, raising the largest dedicated fund in the region so far. PERE Magazine, June 2011 issue

Has Europe reached a peak in terms of firms raising mezzanine debt funds for the region? While the answer to that question may take another year or so to ascertain, last month’s final closing on the largest dedicated mezzanine fund to date certainly suggests a new zenith has been found.

Prudential Real Estate Investors, which in Europe trades as Pramerica Real Estate Investors, announced the final closing of its Pramerica Real Estate Capital 1 Fund on €554 million of third-party capital for deployment as mezzanine loans or preferred equity in the region. Commitments came from eight debt-hungry limited partners, one being APG, the Dutch asset management giant.

The reasons why a mezzanine fund would be a worthy strategy to invest in are well-rehearsed in Europe. No one has failed to detect the huge potential gap between the amount of debt set to mature within the next couple of years and the amount banks are willing to lend. Pramerica itself cites research by Navigant that estimates the difference to be around €18 billion this year, €28 billion next year and €42 billion in 2013.

Strangely enough, Pramerica’s fundraise actually was conceived by the fund’s co-managers as long ago as 2006. Back then, property finance specialists Andrew Macland and Andrew Radkiewicz, both of whom were working for N M Rothschild & Son, felt that regulatory change under Basel II would restrict bank lending. They also noted the way various banks were dominating real estate funding markets that subsequently proved to be ill-fated strategies.

A plan to raise a mezzanine fund, however, was shelved by Rothschild for non-real estate-related reasons. In response, a team of four – including the two Andrews – broke away from the bank in 2007 to explore the possibility of an IPO for a mezzanine platform, Rocksburgh Capital. Given market conditions following the credit crunch, though, the venture was doomed to failure.

Nevertheless, Macland and Radkiewicz next formed Paramount Private Equity and, in January 2009, the ex-Rothschild team finally joined forces with Pramerica, which previously had indicated its willingness to invest. The backing of Pramerica paid off as several investors in the new mezzanine fund previously were unknown to the pair. Indeed, there is a healthy mix of investors in the fund – with UK, European, American, Canadian and Middle Eastern LPs present – and all of them are large, well-known institutional investors.

Radkiewicz noted that the current fund is just the beginning of a wider real estate debt strategy at Pramerica, which suggests more products are in the hopper. Of the current effort, however, he said the fund was pursuing a “non-aggressive” strategy of providing mezzanine finance in a wide range of situations, some of which require as little as £5 million and others needing much larger chunks of £25 million to £75 million.

Pramerica is looking at deals mainly in the UK and Germany. Transactions under consideration include a possible acquisition involving a small portfolio of properties, a “super-prime” London refinancing, a non-London portfolio, a pre-let London development and a situation involving a company with an existing portfolio that is raising money for a joint venture development.

The types of sponsors the fund is working with are a mixture of large opportunistic fund managers looking at making new acquisitions, investment managers looking at refinancing and a wide range of larger private property companies. “We are very happy to look at a range of risk-adjusted returns,” said Radkiewicz. “It doesn’t need to hit 16 percent, as we are doing deals less than that and higher than that.”