Hedging its bets

Man Group’s acquisition of Aalto comes at a difficult stage of the cycle, but with many investors disenfranchised from other investment strategies, now might be the right time to enter the real estate debt market, finds David Brooke.

It’s not easy categorising Man Group. The centuries-old investment management firm manages a range of strategies making its tag line “Always evolving” apt for a firm that started out as a sugar brokerage company in 1783.

The firm continues to extend beyond the hedge fund strategy it subsequently became known for and its latest foray into illiquid credit marks a significant turning point for the firm. The acquisition of Aalto Invest, a real estate investment firm that operates on both the debt and equity side of the capital structure, generated positive reviews as Man’s shares climbed 15 percent immediately following the announcement.

But it’s not an easy time for Man to enter the real estate debt market. Aalto provides debt financing on both sides of the Atlantic, choosing to restrict itself to senior loans within the 30-50 percent loan-to-value range. This places it firmly within the banks’ territory – a less risky position compared with many real estate debt funds.

Aalto founder Mikko Syrjänen says this is down to the current investment climate. “We’ve taken a position over the last several years to be conservative investors due to being in the latter end of the credit cycle,” he says.

Aalto looks to the regions where bank lending has fallen. Dublin offers attractive opportunities to lend due to an enormous drop in appetite for the banks to lend following the global financial crisis. “Many of these institutions are still in balance sheet repair mode, with little capacity for new lending,” Syrjänen says.

In the US, a dearth of lenders in the single-family rental and multi-family unit space has meant that Aalto can find debt opportunities within the terms outlined in its conservative strategy. This culminated in one of the firm’s largest loans – a $100 million debt financing completed in the fourth quarter – secured against 1,000 new-build single family properties in Texas.

Even as the space for real estate lenders in the US and Europe opens up, moving under the wing of an entity such as Man Group makes sense for Aalto. With no overlapping strategies, the acquisition marks the first step into the asset class and generates momentum for Man’s newly formed Man Global Private Markets Group. Syrjänen, alongside Aalto co-founder Petteri Barman, serves as head of real assets within the team.

The advantage for Aalto is that it now has a large international platform to market its products as well as a deep infrastructure, in addition to accelerating the growth of the firm. “Man’s sizeable team helps with legal and compliance requirements. It helps us to critically scale upwards with the goal of attracting interest from pension funds and insurance companies – to access a broader investor base,” Syrjänen says.

Many have been predicting a wave of consolidations in the private debt market. The growing popularity of senior strategies has attracted an increasing number of participants to the market, which many now perceive as overcrowded. Barring a couple of examples, this has not happened to the level initially expected.

What has been taking place is that a number of hedge funds are eyeing up private debt strategies as a way of navigating the turbulence being felt in their industry – high fees and low returns have turned many disenchanted pension funds away. Man’s acquisition of Aalto is a pivot towards illiquid strategies, and by planting its flag into the still-nascent real estate debt market at this stage of cycle it has made an interesting bet.