Should You Buy Into A Distressed Debt Fund?

Posted by: Chris Palmeri on September 9, 2009

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.

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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

Reader Comments

Erica

September 11, 2009 4:02 PM

About Louis Kestenbaum - A teenage girl has filed a $50 million lawsuit against a New York billionaire, saying he sexually abused her when she was 14.

Louis Kestenbaum"s attorney says the allegations are false and motivated by money. Kestenbaum is also the CEO of Fortis properties and the ODA a goverment funded organisation in the williamsburg section of Brooklyn NY

The girl, now 17, claims Louis Kestenbaum invited her to his Florida mansion in 2005 to perform a massage for $300. The lawsuit, filed in federal court, claims he demanded she remove her clothes, then sexually assaulted her.

The girl, her father and stepmother are seeking more than $50 million.

JOEL KESTENBAUM a son of Louis Kestenbaum said " The family is in shock " but had no comments when asked.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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