This post first appeared in London-based firm targets hard cap and will allocate across UK and continent

In April London-based private investment firm RoundShield announced that it had raised $750m (€682m) on behalf of its latest fund – Fund V – in a first close. The vehicle focuses on European asset-backed special situations and distressed opportunities at a time when there is an increasing lack of capital solutions available.

RoundShield, which has 51 employees and about $4bn of assets under management, started building its presence in continental Europe about seven years ago, with European headquarters in Geneva and an office in Madrid, which it opened in 2017.

React News sat down with Driss Benkirane, the founder and managing partner of RoundShield to discuss the upcoming close of Fund V and how the firm will deploy capital across the UK and the continent.

Benkirane was previously co-head of real estate special situations at Highbridge/DB Zwirn in New York and London. He also worked at JPMorgan Partners in New York, where he responsible for the execution and asset management of real estate and lodging private equity transactions, after starting his career as an investment banker at Salomon Smith Barney in New York.

When are you planning to reach final close with Fund V?
We launched in the first quarter of this year with a target of €800m and we have a hard cap at €950m. We are at about €830m right now after a first close at $750m in April. The reason we use dollars and euros is that even though the fund is denominated in euros, we also have a very large USD feeder. For the first close, the vast majority of investors were in that feeder. Historically we had a disproportionate US LP base but we’ve made a concerted effort to attract more Europeans. For Fund V, we should be about 50/50 Europe and the US.

We have a number of investors that are in due diligence and we are looking to hold a final close in the first quarter. We have already committed about half of the capital we’ve raised.

What is the focus in terms of deal size, asset types but also geographies?
Our sweet spot in terms of deal size is between €/£40m and €/£80m but we’ve done deals as small as €/£20m and as large as €/£150m.

In terms of types of assets, we are not purely focused on real estate. We are an asset-backed special situations firm. But in any given fund, about 80% of our underlying collateral will be some form of real asset – ie real estate and infrastructure – and then about 20% will fall into the financial assets category.

Financial assets can be anything from litigation claims to consumer finance to trade finance and other financial instruments. The commonality is that ultimately there’s an asset that we can liquidate in a downside scenario.

In terms of geographies, our core markets are Scandinavia down to Spain – and then as far west as Ireland and as far east as Germany and Austria.

We completely stay away from central and Eastern Europe and Italy. We have no actual restrictions but they’re just not markets where we have deep sourcing relationships or restructuring experience.

Our first fund was probably 70% UK and Ireland and the balance was continental Europe. By Fund III and IV, we had a 50/50 split between UK/Ireland and the continent. Today, I would say that we will likely end up with Fund V being about 70% continent and 30% UK.

Why has this geographic shift occurred?
That’s been largely driven by market conditions. Germany and Scandinavia have been very difficult markets for us historically because there’s been a ton of liquidity. They didn’t really suffer in the aftermath of the Global Financial Crisis (GFC) so when we invested on the continent, it was primarily in Spain.

Today, the epicentre of the distress is really Germany. We are obviously seeing dislocation in Scandinavia – you’ve got the large public companies that are overindebted and we’re seeing similar patterns at the smaller end of the market and in private transactions – but we think that Germany is a much larger problem, just given the sheer size of the market.

In Scandinavia you also saw a lot of leverage in the system but in Germany it was even more accentuated because you had a lot of capital structures with virtually zero equity as well as asset values at levels that frankly made no sense for us at the time. It’s a trickle at the moment but there’s going to be a much more significant distress cycle as a result of what’s been done for the last 10-15 years.

What is your focus in Germany and Sweden?
Residential, leisure and social infrastructure – anything from social housing to educational facilities that are leased to the government or to government subcontractors, police stations and hospitals to actual traditional infrastructure such as cogeneration plants on long leases to municipalities.

How much distress is there at the moment?
It depends on the market. In the UK we are seeing a lot of distress, especially in the construction sector, and we’ve participated in some transactions there.

In Germany and Scandinavia, we’re not necessarily seeing banks enforcing quite yet but we’re seeing banks apply a lot of pressure on borrowers to refinance them. So for the time being, the vast majority of what we’re doing is providing white knight financing – ie replacing maturing bank debt or bonds. From the borrower’s perspective, it’s a bridge into market recovery.

We’re not as optimistic as a lot of real estate developers, even though our base case remains that rates will start coming down in the eurozone at some point next year. However, we don’t believe that they’re going to go back down to negative territory. So there’s still bound to be some level of distress and valuations have to be rationalised.

Valuing office buildings at sub 3% cap rates is something that I hope we will never see again – and not just because of obsolescence risk, but also because your cost of capital is that much higher and the quantum of capital you can secure is much lower than what it used to be historically.

So we are seeing a lot of pressure from lenders on borrowers to take them out even on deals where they’re deeply in the money. Our job is really to find those situations where the debt is still in the money and then some – and either replace the incumbent lenders or buy the assets at the debt level.

Where are we in the repricing cycle?
It’s hard to say because the volumes are down 75% or more. We’re all still in that price discovery phase.

We’ve sold a number of assets over the last year and we’ve had assets, like student housing in the UK for instance, that have traded at similar cap rates to what they would’ve traded for two years ago.

But in virtually every case, we had the right buyer. We’ve sold assets to Middle Eastern buyers who are cash buyers and thinking over a much longer time horizon. However, I wouldn’t use those as examples to make a statement with respect to the market as a whole.

We’ve always been very disciplined about our yield-on-cost and would not do anything unless we could really create an 8%+ yield. If rates are maintained at similar levels to where they are today, the market prices will have to converge at 200 to 300 basis points over base rates.

The office and retail sectors have issues that are not necessarily related to rates. Retail has obviously been distressed for a very long time. We have virtually no exposure to retail and have stayed away from offices. All-time lows in terms of cap rates and all-time highs in terms of rents and occupancy rates. It was unsustainable and ultimately demand for office buildings is not inelastic. People don’t have to work in an office the same way that people actually have to live somewhere.

So our focus has been very much on assets with very strong supply demands fundamentals and with highly inelastic demand. Those assets should be far more resilient in a highly inflationary environment and I think they have been. Even if cap rates move up, higher rents have largely offset the movement. So values overall have largely held steady and in some cases even gone up.

So we are still in a price discovery environment but certain asset classes are inherently better protected because of the supply demand gap and the nature of the demand.

Will you continue to avoid offices?
We are spending a lot more time on offices today. For the time being, mainly in the UK.

We’re only focused on prime assets in very strong locations, typically outside of London. London is still too expensive. We bought an newly built office building in Dublin – in a very good location with the highest ESG standards – out of the bankruptcy process at a very deep discount to replacement cost.

We are selectively looking at office buildings and are not saddled with any legacy office stock.

How tough is it to be raising money in the current environment?
It’s been a very tough year. Unfortunately, when the best opportunities are obvious, that’s also when it tends to be the hardest period to raise capital.

Historically, all of our funds were effectively closed within three months of launch. This one will likely take about 12 months. Still relatively fast but definitely more challenging.

Volumes and therefore exits are down across all illiquid assets so that has a knock-on effect on investors’ ability to allocate to real estate and to special situations more generally. A lot of our investors actually tend to invest in us out of non-real estate buckets, such as special situations or credit. But the challenges are the same across all of those buckets because they’re inherently illiquid.

That being said, there are still a lot of LPs out there who have liquidity and there’s strong interest in what we do as we have a history in this specialist space in Europe.

The bulk of the distress, or at least of the stress, at the moment is really focused on real estate and that is the largest part of our business. So we’re extremely well positioned and that’s why we’ve been able to surpass our target despite the market challenges today.

What are the big differences with the GFC?
For the time being, we’re nowhere near the GFC. Banks have been far more disciplined going into this cycle. A lot of the distress, if you take a market like Germany, is related to the guys who were sitting behind the banks. So I don’t see it as a significant threat to the banking system and as a result, I don’t think you’re going to see the massive NPL portfolios that we saw in the aftermath of the GFC.

Today we’re seeing a very significant liquidity issue with the way rates have moved and banks still holding a lot of real estate exposure – and there’s virtually no capital that’s coming out of the banks to provide new capital towards transactions in the mid-market space that we invest in. And so it’s a bit of a frozen market but I don’t see this playing out in the same fashion as the GFC.

And the reality is that if inflation is tamed and rates start coming down next year, there’ll be a soft landing for the banking sector.

Are you not interested in looking at logistics more closely?
Our view is that we missed the boat on logistics. From a debt perspective, there has been a lot of cheap debt available for logistics, so that’s just not something that we’ve built any exposure to.

Do you have exposure to the hospitality sector?
We have been building up exposure to the sector, in which we include hotels, vacation/second homes and holiday parks. We didn’t go into Covid with any hotel assets but post-Covid, the performance has been extremely strong. Our focus has really been on vacation-type hotels and airport hotels. And then on the vacation home side, we have a lot of exposure in markets like Marbella and Ibiza, where prices continue to go up.

Long term. even if from an industrial and tech perspective, Europe may fall behind the US and Asia, we think that there’s a tremendous amount of resilience on the tourism side.