Displaying items by tag: rates

Institutional investors and money managers came together at the annual PERE America Forum and shared some thoughts on the private real estate market. The overall sentiment is that conditions will remain challenging until 2025 due to a large amount of commercial real estate debt that needs to be rolled over or refinanced at much higher rates.

According to John Murray, the head of PIMCO’s global private commercial real estate team, the situation is as bad as the Great Financial Crisis in terms of dislocations in capital markets. He notes that Fed policy is the major headwind, and its ‘crushing’ sentiment and liquidity. 

Sajith Ranasinghe, head of real estate at Church Pension Group, remarked that price discovery has been limited so investors are focusing more on income. He also expressed interest in private REITs which are down over 30% since rates began moving higher in 2022. 

Saul Lubetski, the vice-chairman of Harbor Group International recommends a ‘scalpel approach’ as $1.5 trillion of maturities are set to expire by 2025. He notes that the refinancing has already begun, albeit at a smaller and slower pace which should accelerate this year. However, it’s increasingly evident that borrowers are finally making peace with higher rates. 

Finsum: At the annual PERE conference, institutional investors and money managers gathered to share some thoughts on the private real estate market.

Rich Hill, the head of Real Estate Strategy at Cohen & Steers, shared his bullish outlook for REITs in 2024. He sees falling interest rates, tightening credit spreads, and undervaluation as the biggest catalysts for significant gains over the next year. However, he cautions that office REITs have their own dynamics due to vacancy rates remaining elevated amid the increase in remote and hybrid work.

REITs benefit in two ways from lower rates - their yields become more attractive to investors on a relative basis, and it leads to lower financing costs. Hill points to improving credit markets as another reason to overweight the sector in the coming year. This means REITs will have an easier time accessing credit which will lead to more activity such as acquisitions and new projects. Historically, REITs have outperformed during periods of tightening spreads and falling rates. 

Another attractive component of REITs is that valuations are compelling as prices have declined over the past couple of years, while earnings have remained quite stable due to the economy avoiding a recession. Further, most REITs continue to have a relatively low cost of capital due to refinancing at lower rates in 2021. 

Finsum: Rich Hill of Cohen & Steers is bullish on REITs for next year. He sees falling rates, tightening credit spreads, and an improving credit markets as major catalysts. 

JPMorgan is looking for a partner to accelerate its push into private credit. Some current prospective partners include sovereign wealth funds, pension funds, endowments, and alternative asset managers, although it’s possible that the bank may ultimately go with multiple partners. 

Reportedly, the bank is looking to add to the $10 billion it’s already set aside for its private credit strategy. It believes that this additional capital will enable it to compete with other names more effectively in the space such as Blackstone, Apollo Global, and Ares as it would be able to make bigger deals. Additionally, there would be less balance sheet risk as the bank would originate the deals with its outside partner, providing the capital. In theory, this would allow for more scale to grow private credit revenue without additional risk. 

Due to banks dealing with an inverted yield curve and high rates, private credit has been taking market share away from other sources of capital like leveraged loans and high-yield bonds. Already, many of JPMorgan’s competitors like Barclays, Wells Fargo, and Deutsche Bank have launched their own efforts to build a presence in the private credit market, although each has its own strategy.

Finsum: JPMorgan, like many Wall Street banks, is looking to increase its presence in the private credit market. It’s currently in discussions with prospective partners to provide outside capital.

Companies with large amounts of debt approaching maturity are tapping the private credit industry for financing that may not be available through public markets. The latest example is PetVet, a veterinary hospital operator owned by KKR, which is looking to refinance more than $3 billion in loans. Other recent examples of companies include Hyland Software, Finastra, Cole Haan, and Tecomet which have raised a cumulative amount of $10 billion in the past few months. 

With private credit, companies are able to bypass traditional banks and access billions in loans. This is being facilitated by a surge of inflows into the asset class which is leading to funding for takeovers and to refinance debt. 

Another factor supporting the growth of private credit has been weakness in the syndicated loan market, where banks arrange financing and then sell the loans to other investors. Given that over the next 3 years, $350 billion of leveraged loans are set to mature, private credit will continue to be a necessary intermediary especially for companies with higher debt loads.   

Typically, private credit investors earn between 5 and 7% above benchmark rates which comes in at between 10.5% and 12.5%. In contrast, the average yield on B rated corporate bonds is 9.2%. 

Finsum: Private credit is playing an increasingly important role when it comes to providing financing for companies. Here are some of the major factors behind this shift. 

Earlier this year, the Carlyle Group was close to completing a $15 billion deal to takeover healthcare software company Cotiviti at $15 billion. However, the deal fell apart as Carlyle was unable to raise $3 billion from investors due to the yield of 12% being nearly equivalent to the return on equity. 

At first, many speculated that this was a Carlyle issue, but in hindsight, it’s an indication of the pressures faced by the private equity industry amid the highest rates in decades. Many of the strategies employed by private equity managers are simply not viable in a world with higher interest rates. 

As flows into new funds have slowed and pressure to refinance, private equity firms have started borrowing against assets to make dividend payments, while others are shifting away from making interest payments in cash. 

The industry still has $2.5 trillion in cash, and many dealmakers believe there will be some attractive opportunities to capitalize upon. Still, others believe that operators will have to adapt to a new environment and can no longer rely on the tailwind of falling rates which lifted asset prices higher, while keeping financing costs low. 

Finsum: Private equity is struggling amid higher rates. Here are some of the ways.