Last week it emerged that Starwood Capital, one of the world’s largest privately held global investment firms, had won the race to buy another US giant.
It is understood to have outbid Rialto Capital Management and BGC Partners in the battle for LNR Property – the world’s largest commercial mortgage servicer – paying more than $1bn (£620m).
LNR’s owners – Cerberus Capital Management, Vornado Realty Trust, Oaktree Capital and iStar Financial – appointed Lazard to sell the business or look for new capital earlier this year.
The acquisition makes perfect sense for Starwood in the US because it gives it access to more than $25bn of distressed loans and a huge investment platform. But what does it mean for LNR’s European business, special servicer Hatfield Philips?
Questions have long been asked about the future of Hatfield Philips. Indeed, in 2009, CBRE, Capmark and Capita were all understood to have run a slide-rule over the firm. And, according to sources close to the parties involved, that opportunity could raise its head again.
“Europe has no relevance or interest to Starwood at all,” said one. “It’s much smaller than the US business, and is running off much more quickly.”
Despite managing £23bn of loans in Europe – the majority of which are in Germany and the UK – Hatfield Philips’ business is shrinking.
Most loans in Europe are based on five-year terms, with the majority of those secured in 2006. That, coupled with little or no CMBS issuance in Europe, has led experts to warn that the end of its income is in sight.
“Europe is a big and expensive platform,” said one insider, “and its revenue is dying.”
Loans in the US are generally agreed on 10-year terms, and CMBS activity has started to pick up, meaning the North American business has longevity, making it a more viable investment for Starwood.
Sources also warned that Hatfield Philips could see itself voted off from loan-servicing jobs as a result of rivalry from tranche holders in the debt. Investors such as Fortress and Loan Star – both of which have their own servicing platforms – could be uncomfortable with a Starwood-owned servicer managing their debt.
Others in the market think Hatfield Philips could give Starwood the extra expertise it needs to start winning some of the non-performing loan portfolios it has recently been chasing in the UK and Europe.
The investor has unsuccessfully bid for the Lloyd’s Banking Group’s £825m Project Harrogate and Allied Irish Bank’s £397m Project Pivot. Having the LNR and Hatfield Philips business as part of its empire could help it analyse, run and work out the large NPLs it has been targeting.
Ezra Nahome, chief executive of Lambert Smith Hampton, which has advised buyers on loan portfolios, said: “There is a trend of US investors coming to the UK and Europe. Many of those that don’t have an established platform are trying to get a slice of the NPL market. Acquiring a servicing delivery platform is helpful to this.”
Whatever happens, Starwood will have to come up with a strategy for Hatfield Philips if the acquisition of LNR goes ahead.
Some think that means winding down the firm or selling it back to the management. For others it means creating a platform for an assault on the European NPL sector.
With loan sales being the only major source of activity in UK and European property over the past year – a trend set to remain – it has to make sure that decision is right.
