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Dec 14 2010

Debt Capital Markets and International Opportunities

CMBS 2.0 and the expanding frontier of emerging markets

By Devin Duffy '12

A highlight of the 2010 Kellogg Real Estate Conference was the Debt Capital Markets and International Opportunities panel moderated by Morgan Stanley’s Robert Weaver ’91. The panel included two Kellogg alumni – William Sullivan ’83, CFO of ProLogis, and Scott Waynebern ’96, Managing Director at Deutsche Bank – as well as three other distinguished guests including E.J. Burke, Executive Vice President at Key Real Estate and Corporate Banking Services, Chris Fiegen, Chief Portfolio Officer of Equity International, and Quintin E. Primo III, Chairman and CEO of Capri Capital. The discussions ranged from the future of CMBS in the United States to the unique strategies being pursued in emerging markets around the world.

Panelists Chris Fiegen, Quintin Primo and Bill Sullivan '83 at the 2010 Kellogg Real Estate Conference
The panel kicked-off with discussions about the genesis of the CMBS market and hypotheses about what the revitalized securitization market, dubbed “CMBS 2.0,” may look like. Mr. Waynebern, founder of Deutsche Bank’s secondary CMBS trading desk, said that there is currently a high demand for CMBS paper which is evidenced by the tightening of spreads throughout the CMBS structure. This demand is also manifested by the uptick in CMBS issuances in 2010 as well as the re-emergence of CMBS platforms at many Wall Street firms.

However, some borrowers are abstaining from endorsing CMBS 2.0 until certain elements of the original CMBS market are fully revisited. Mr. Sullivan indicated that while ProLogis accessed the CMBS markets in the past decade, he remains critical of the inflexibility and other problems with the structure of the CMBS trust. In one anecdote, Mr. Sullivan talked about how ProLogis intended to remit payment to a special servicer but had issues locating the actual person responsible for collecting the payment. Mr. Burke agreed with this assessment and mentioned that many borrowers will resist borrowing from CMBS lenders in the near future until the CMBS 2.0 market matures.

As the domestic real estate markets continue to slowly thaw, some debt and equity investors are searching for yield abroad in untapped emerging markets. Mr. Primo, CEO of Capri Capital, described his firm’s efforts to launch a mezzanine fund targeting high growth, high return investments in sub-Saharan Africa, the Middle East, and India – regions with a young entrepreneurial population base without access to mature capital markets. Mr. Primo discussed Capri’s strategy to joint-venture with local partners in these regions, but also highlighted some of the risk factors associated with the endeavor. Most notably, the lack of access to public capital markets will require an additional risk premium to account for the uncertainty around the eventual exit strategy.

Mr. Fiegen agreed that while investing abroad does present attractive return possibilities, an investor must exhibit patience as investments in emerging markets usually take much longer to source and execute. As an example, Mr. Fiegen pointed out that upon entering Brazil it took nearly five years of careful diligence before Equity International made its first investment there. He closed by noting that while local partnerships in emerging markets are crucial for success, sponsors entering new markets must also truly understand market fundamentals – given the absence of debt financing, the returns must be driven by real demand growth, not by financial engineering.

About the Author

This article was written by Devin Duffy  '12.