The New York-based firm is stepping up financing in the space that yields double-digit returns. — Bloomberg
NEW YORK: A Wall Street alternative money manager is ramping up lending in an area of real estate that’s considered too risky even by some private credit players.
As traditional banks de-risk their books under regulatory pressures and cut back on lending, AB CarVal Investors LP is seeing an opportunity in the residential sector, including the residential development sector that’s been starved of funds.
With at least US$50bil of expected deal flow for residential mortgage loans and residential development lending in Europe alone, the New York-based firm is stepping up financing in the space that yields double-digit returns, managing principal Jody Gunderson said in an interview.
Overseeing roughly US$16bil in assets, the unit of AllianceBernstein Holding often uses relatively cheaper financing from the retreating lenders to make some of the direct loans to the real estate industry.
It also buys loan portfolios from banks and can even obtain financing from the same bank to buy the assets, helping lenders in part to reduce their exposure to riskier assets and lower capital requirements, Gunderson said.
“It’s a way for the banks to stay in the game while threading the regulatory needle,” Gunderson said.
The strategy marks another key shift in lending practices.
This is as hedge funds, private credit players and other money managers fill in the vacuum left by banks.
Over the past decade, the share of alternative and middle-market lending in Europe has surged to more than 50% from 5%, Morgan Stanley Investment Management’s private credit head David Miller told Bloomberg TV on Wednesday.
CarVal was founded in 1987 by Minneapolis-based agribusiness giant Cargill Inc and was bought in 2022 by AllianceBernstein, where it now sits within the parent’s private alternatives platform that manages more than US$60bil.
AllianceBernstein has also been partnering with large global institutions to originate real estate and consumer finance loans, Bloomberg News had reported previously.
For money managers such as CarVal, partnering with banks – by either originating loans with them, or buying secondary portfolios from them, or even getting financing from them to fund direct loans –can provide an edge in a market saturated by an influx of private credit lenders.
With such arrangements, banks also get to retain client relationships, even if the back-room deals produce lower returns for them.
“We are looking to utilise our well-established relationships with banks and non-bank originators to take advantage of this systemic structural shift in one of our core markets,” Gunderson said.
“There’s more room for lenders like us to partner with banks in a variety of ways.”
Real estate development has become especially riskier for lenders because of soaring costs and falling valuations.
While banks on the surface have been busy de-risking, a recent study showed that they’re still exposed to the sector through credit lines to real estate investment trusts, pointing to hidden risks.
CarVal is targeting developers in the United States, United Kingdom and Europe with so-called mezzanine financing, which takes the first hit if valuations fall.
Loan sizes range from US$2mil to US$10mil on individual deals.
The firm has already built up a “good pipeline,” Gunderson said. — Bloomberg
