(Oct 7): Hedge fund firm Deer Park Road Management Co is mobilising capital to snap up debt tied to commercial real estate, betting the investment will eventually mint lucrative returns.
Deer Park has launched its first commercial mortgages fund targeting debt backed by office buildings at steep discounts, chief investment officer Scott Burg said in an interview. The Commercial Mortgage Opportunities I fund is looking to raise as much as US$500 million (RM2.14 billion) for the strategy that offers an 8% hurdle rate, he added.
A sustained period of elevated interest rates have hammered valuations and sparked a wave of defaults in parts of the commercial real estate market, leaving lenders rushing to dispose of some of their higher quality assets to shore up cash and avoid deeper losses.
“The volume of distress in the office space has led to price dislocation and we’re seeing commercial mortgage backed securities trade at some very deep discounts,” Burg said. “Most are dumping exposure to commercial real estate and particularly office space indiscriminately, so for us, we see this as a massive opportunity.”
Founded in 2003 by Michael Craig-Scheckman — one of the first employees of Izzy Englander’s Millennium Management — Deer Park oversees more than US$3 billion in assets. Known for its profitable wagers on deeply discounted mortgage- and asset-backed securities in the year following the 2008 financial crisis, it is seeking similar opportunities about 15 years later.
The Steamboat Springs, Colorado-based firm is looking to attract investors from the the Middle East and Europe, and from multistrategy hedge funds, Burg said.
“Valuations in some cases are down about 60%-80% from when borrowers took out the loans,” Burg said. “Additionally, we are seeing cracks in multifamily and in commercial real estate CLOs where liquidity is scarce, but for us we’re happy to take that on as we have the time to invest and see out the cycle.”
It’s a similar story with REITs, with many borrowers handing over the keys and walking away as delinquencies and defaults increase, Burg said.
“We’ve stood on the sidelines while prices have fallen but now we think the time is right to step back in,” he said.
Uploaded by Siow Chen Ming