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Should You Buy Into A Distressed Debt Fund?


A slew of new REITs that will invest in troubled real estate loans are about to hit the market. Nicholas Einhorn, an analyst at Renaissance Capital, adds up 18 new initial public offerings that are in the works. The deals follow earlier offerings from PennyMac and Starwood Property.

PennyMac, founded by former Countrywide exec Stanford Kurland, had to cut the amount of money it raised when investor demand proved weak. Starwood, on the other hand, raised a more than hoped for $830 million in August.

Many of the players behind these REITs also made a killing in distressed real estate after the late 80s savings and loan crisis. They include Starwood’s Barry Sternlicht, Colony Capital’s Tom Barrack and Apollo’s Leon Black. This time they are cutting the little guy in for a piece of the action.

Not for free of course. These funds typically charge 1.5% annual management fees and the managers keep 20% of the profits over a certain hurdle rate. Colony claims it made a 48% average annual return after fees on its 1990s partnership. “The pitch they make is that it’s a very actively managed business,” Einhorn says. “Whether that justifies the fees remains to be seen.”

Another risk: Since most of these investors also manage private funds there’s a chance that they’ll keep the best deals for themselves and stick the public investors with the stinkers.

Here’s a list of some of the other IPOs still in the pipeline. Of those, Marathon is focuse on residential real estate loans. Bayview and Foursquare are both residential and commercial. The rest are commercial real estate-focused, according to Renaissance.

Ladder Capital Realty

Transwestern Realty

Apollo Commerical Real Estate

Colony Financial

CreXus Investment

Petra Real Estate Opportunity

Bayview Mortgage

Foursquare Capital

Marathon Real Estate

Brookfield Realty Capital


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