Opportunistic GWM takes the senior route to returns

The London-based asset manager, which has a special situations background, is raising for a senior property loans strategy.

Until relatively recently, GWM Group would have been an unlikely candidate to provide senior finance in European real estate.

The London-headquartered firm was founded in 2000 as a wealth manager for Italian family offices – its name is an acronym for Global Wealth Management. It became an independent asset manager in 2010. In real estate debt, much of its activity over the past decade has involved high-yielding activities, including buying non-performing loans in Italy – its partners’ home country and the scene of much of its business.

In 2019, it arranged and invested, alongside US manager PIMCO, in the €1.3 billion Project Sandokan 1 NPL portfolio from Italian bank UniCredit. It followed this up in 2020 by investing in a €2 billion successor portfolio, Sandokan 2, from the same seller.

Outside Italy, it partnered with investor Helios Capital for an £85 million ($119 million; €99 million) speculative development financing of the Aldgate Tower office scheme in London for an Irish sponsor in 2013. The deal, which included preferred equity, was a rare example of speculative development finance in the UK capital at the time.

Despite its pedigree in opportunistic and high-yielding real estate lending, GWM is turning its attention to senior real estate loans. In August, it secured a €75 million commitment from an Italian pension for its Commercial Real Estate Debt Opportunities fund. The pandemic slowed its fundraising, but it plans to seek commitments to bring the closed-end vehicle to €500 million.

According to managing partner Gennaro Giordano, the strategy aims to cater for mid-market sponsors seeking loans of at least €20 million against transitional properties – too small for investment banks, but too complex for commercial banks. “It is a new product for GWM,” he tells affiliate title Real Estate Capital. “We have been more active in opportunistic real estate equity and lending, as well as distressed deals. But we saw a big gap, especially in continental Europe, for financing for mid-cap borrowers and projects.”

Diversification drive

The strategy is also about diversification. “We want to increase the range of products we offer to our investors,” says Giordano. “Pre-covid, we had already noticed the trend in the banking sector, but covid has made lending more difficult across the banking system, so our conviction about this is even stronger.”

In December 2020, GWM used the CREDO fund to provide a senior loan of around €70 million to finance the acquisition and development of a portfolio of prime logistics properties in the Milan area for a fund managed by Savills and owned by private equity firm Angelo, Gordon & Co and logistics property company Bell Real Estate. The borrower was advised by London-based Conduit Real Estate.

CREDO has an evergreen investment period, meaning GWM will recycle investors’ capital to continue to find lending opportunities until investors opt out. Investors will have the option of allocating capital to levered and unlevered sleeves of the fund. The loan-on-loan leverage for the levered sleeve will be up to 60 percent.

“We saw a big gap, especially in continental Europe, for financing for
mid-cap borrowers and projects”

Gennaro Giordano

By focusing on transitional real estate, GWM is targeting margins of 300-600bps, depending on risk, leverage and jurisdiction. “We will provide leverage up to 65-70 percent which, especially since the covid crisis began, is not easy for borrowers to find,” says Giordano. “If you go to a traditional commercial bank with a lease-up story, it has become more difficult to get money.”

GWM is targeting an 8 percent return for the levered sleeve. “This represents a great risk-adjusted return, with a premium to equivalent fixed-rate income products in the market such as CMBS or syndicated loans,” he adds.

Arturo De Visdomini, a former investment banker who joined GWM in 2019 to lead the efforts to launch CREDO, says the fund has around €200 million of capital at its disposal, including leverage. “We are approaching this with the mindset of a private equity sponsor, which means we are more flexible than a traditional lender,” he says.

“The CREDO fund aims at offering the sophistication and speed of execution typical of investment banks, but on a smaller scale, positioning itself among alternative lenders in the space between opportunistic lenders, such as US managers targeting double-digit returns, and insurers providing senior debt on core, plain vanilla assets.”

CREDO has a pan-European remit. GWM will be looking for lending opportunities in Italy, where the fund has made its first loans, the UK, France, Spain and the Netherlands. Germany will also be on its radar. De Visdomini says it will consider most asset classes: “Of course, retail and hospitality are areas we look at with extreme caution. We like logistics, but also residential and offices, with caution.”

He adds that GWM has spoken “selectively” with potential investors for the next stage of its fundraising. “We sense a lot of appetite, more than ever, for debt strategies, in particular from insurance and pension funds,” he says. “They see the relative value of a defensive strategy at this point in the cycle.”

Distressed opportunity

GWM continues to look for opportunistic and distressed real estate debt transactions. It continues to deploy its €500 million Italian Real Estate Special Situations 2 fund, which closed in 2019, through which it buys NPLs and provides special situations debt and equity. A third fund in the series is likely to be raised in the second half of 2021.

Giordano says the strategy’s focus is likely to spread from Italy, where the bulk of investments have been made so far, including the two loan portfolios from UniCredit. However, he adds GWM will continue to look for Italian opportunities. Giordano does not expect there to be a wave of distressed real estate on the scale that was seen after the 2007-08 financial crisis, but he does expect an increase in loan defaults and situations requiring emergency capital.

“Once government support is removed across Europe, there will be a need for new capital to restructure situations,” he says. “We expect to see distress in leisure hotels, but also business hotels as people travel less and for longer. There is still a lot of pain to come in retail, and institutional investors are still very selective on where to put capital into it. However, some retail will survive and generate stable income.”

Giordano also expects distress in the office sector, particularly for “tier 2” assets that do not comply with investors’ ESG requirements: “We will see this particularly in cities such as London, which are more exposed to commuting and where work-from-home will impact the type and size of office space required by occupiers.”

He adds that opportunities to invest in distressed situations are likely to come from the European commercial mortgage-backed securities market. “The first situations to come to the market will be from CMBS deals, because some retail- and office-backed CMBS will be struggling,” he says. “It is still early but, at some point, the senior tranche will need to be repaid and there will be forced sales.”

Covid-19 has had a significant impact on the provision of debt capital in Europe’s real estate markets, prompting traditional lenders to minimise risk, and encouraging alternative lenders to move into new parts of the market. For GWM, senior lending has become attractive. However, as a firm with experience in opportunistic debt investing, it is unlikely to let its attention stray from potential distress.