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|Moderator||John Klopp, Morgan Stanley|
|Panelists||Jeffrey Citrin, Square Mile Capital Management|
|Greta Guggenheim, TPG Real Estate Finance Trust|
|Michael Magner, Natixis Real Estate Capital|
|Michael Nash,Blackstone Real Estate Debt Strategies|
By John Pollock ’17 and Joe Gruseke ’18
John Klopp led a panel of four distinguished real estate professionals in a spirited discussion regarding the growth of alternative lending, while also debating what the future had in store for the industry. The panelists began by defining the drivers behind the growth of the alternative lending/specialty finance industry, sometimes referred to as “shadow banking.” In this regard, agreement was unanimous that while regulatory changes might have acted as the initial catalyst for the industry’s growth, there will continue to be demand regardless of any upcoming regulatory changes from a new administration, including the repeal of Dodd-Frank. Micheal Magner, speaking from his perspective as a bank lender, asserted that banks will continue to value specialty finance because it allows them to focus exclusively on the senior debt that they are targeting. After discussing the growth of the industry and establishing the continued relevance of the practice going forward, Mr. Klopp asked for the panelists’ thoughts on the potential impact of the impending maturity wall. Mr. Magner led things off by explaining the issue at hand—ten year loans issued pre-crisis in 2007 were underwritten with lofty NOI projections which have fallen short of expectations. Michael Nash agreed with this point, taking it one step further by saying that while the good deals have largely been refinanced already, those left over could be messy. Mr. Magner concurred, saying that most of the activity would not be bank business because of its risky nature, once again illustrating the market demand for alternative lending.
With the panel in agreement that the markets were efficiently directing capital, Mr. Klopp posited the question of whether alternative debt funds have popped up too quickly, asking the panel if there is actually too much capital available. Jeffrey Citrin responded by saying that the number of funds has certainly increased dramatically, but there are only 15-20 viable debt fund sponsors, contrasting the “real players” to two guys with a Bloomberg terminal in their garage to drive home his point. The other panelists agreed with the importance of this distinction and the discussion quickly turned to the inherent barriers to entry in establishing a real debt fund for the smaller players in the industry. On this matter, Greta Guggenheim emphasized that the institutional market knowledge that comes along with a fully developed platform, particularly where equity deals are also being sourced, is a major differentiator. She also brought attention to the importance of scale and the need to continue to raise capital. The banks value knowing their counterpart lenders in a deal are well-capitalized, so access to capital is critical for alternative lenders. Mr. Citrin agreed, adding that banks are discriminating when choosing their mezzanine and B-piece partners because beyond the access to and ability to replenish capital, those partners need the skills to step in and operate the property if the borrower cannot service its debt. Mr. Magner supported these points by adding that they do most of their work with the same counterparties to ensure certainty of closing. In this sense, the panel seemed in general agreement that while the number of debts funds has risen dramatically, the core platforms will have an advantage going forward.
After a conversation describing the characteristics of a typical loan for each respective firm, the discussion wrapped up with each panelist being asked how they saw the industry changing four years from now. On the whole, the panel did not see dramatic change as imminent, but did expect some choppiness in the near term given the long duration of the current recovery. In this regard, the importance of having a well-diversified platform was once again brought to the forefront, with Mr. Nash concluding the discussion by stating that those most prepared to identify where capital is and where it is heading, will have the most success in effectively deploying it in a changing landscape.
Joe Gruseke ’18 is a 2010 graduate of Colgate University, where he completed his B.A. in Political Science. Prior to coming to Columbia Business school to focus on real estate, he spent five years trading emerging market debt in Stamford, CT. Joe is interested in pursuing a career in real estate investment and acquisitions after completing his M.B.A.
John Pollock ’17 is a second-year MBA student. During the past summer, John worked for Spear Street Capital, a private equity real estate firm. Prior to Columbia, he worked at HarbourVest Partners and Cambridge Associates. John graduated from Boston College with a BS in Finance and Accounting.