What is the best strategy?: European debt funds are faced with questions on how best to deploy their capital
The original focus of debt funds that entered the commercial real estate lending market in 2009 was pure commercial real estate mezzanine debt, as investment managers sought to marry together the return parameters of the “alternatives” allocations of fixed income investors with commercial real estate debt.
Driven primarily by the demands of these investors for a significant premium in return over other more liquid investments, more than 100 mezzanine lenders emerged across Europe in the post-crisis era. However, since then, this number has significantly rationalised due to a greater convergence between investors’ yield expectations and the market realities. Fundamentally, this was a pricing issue, and a number of lenders who struggled to deploy capital into the mezzanine market re-examined their strategy and reverted back to direct equity investments in order to satisfy their investors.
Historically, mezzanine lenders provided medium-term financing at an average