Cerberus raised $5B+ for a RE NPL fund in 2019. Can someone shed some light on the strategy here? What do they do after acquiring these NPLs?
It seems like they are by far the biggest in the space. Why aren't there others pursuing this strategy?
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there's a ton of groups doing this in Europe. Dozens of FT articles talking about it. hasn't been much of an opportunity in the US lately (still TBD post-covid).
Same thing as all distressed debt. Buy turds from banks at a discount so they can delever, and then try to get borrower's to pay you off (or sell at a higher price to other turd buyers)
Personally I find the NPL model fantastically boring but to each their own
In a world of garbage the trashman is king.
Thanks for the insight. What happens if the borrowers don't want to pay? I'm guessing it then becomes a loan to own type strategy?
[deleting - redever did a better job just read his response]
While sometimes they do have to go all the way and take over the property (via foreclosure or voluntary surrender), they are more commonly just buying loans that are "impaired" in valuation or otherwise illiquid on the balance sheets of banks/funds that want to unload them (i.e. take the loss, and relend/reinvest, vs. continue to hold with a loss reserve). Thus, the holder sells at some discount to par (could be 90% or even less, not always a "huge" discount), and the NPL fund sometimes just holds until paid off at par and doesn't really do anything active, sometimes they may need to do the "workout".
Keep in mind that "non-performing" is not the same as "non-paying", a loan or borrower can violate covenants and thus the loan can earn the tag and cause issues for the holder. For the NPL fund, its a way to earn higher rates of returns off of debt instruments, but buying them can be hyper competitive with so much money raised for the strategy (so is the issue with everything these days!!)
This is interesting but how are those higher returns actually achieved? By charging more interest on the debtors? Surely Cerberus etc are playing this as a way of potentially grabbing the underlying assets at discounted prices?
They use leverage to buy the loans - I am not sure if this takes place all of the time but people who I have spoken to in the space do it this way.
Leverage, but there’s also default interest that may be accruing as well
If a loan pays 5% at par ($100), you make $5 per year. But if you buy the same loan for $0.90 on the dollar ($90), the loan now pays 5.56% ($5/$90). This is his NPL funds make money. Now add leverage.
In certain cases you'd prefer to be refi'ed out or come to consensual repayment with the borrowers rather than take control of the assets. NPL portfolios can include hundreds or thousands of loans and enforcement on individual assets is a costly and time consuming process, particularly for residential properties in some European countries.
I don't see many replies to your question - What do they do? - so I will shed some lights.
To answer the question, let me summarise a bit the pricing logic of NPL portfolios. Depending on the portfolio, the NPLs are usually split between Unsecured loans and Secured loans. If you are talking about a mostly Secured portfolio, the breakdown would be something like 10-20% Unsecured and 80-90% Secured.
To conclude and answer your question: funds like Cerberus have an investment team that is constantly looking for new portfolios, following similar pricing strategies as the ones highlighted above (Unsecured vs Secured); Once the portfolios are required, they have to work them out and follow the workout strategies mentioned above. I guess that Cerberus has its own Asset Management/Portfolio Management team so that would be a different team than the ones who did the Underwriting.
**Disclaimer: These examples are based on my experience in one of the Southern-European countries. Please note that costs, legal processes, markets etc. change dramatically between countries, even if neighbouring countries in Europe...
Just for my own curiosity (have looked at some companies in the space from a sponsor investment PoV) is there a huge difference between the day to day and total comp of an analyst at somewhere like Hoist vs an analyst at somewhere like Cerberus?
Hey,
Apologies for the late reply.
Re Comp
I don't know exactly how much they make but my impression is that you should make +10-20% base salary at Cerberus (e.g. £45-50k vs £50-60k); the bonus should be +25-50% more than Hoist (e.g. 30-50% vs 45-75%)?
I say this solely based on the people I saw going to each one of the shops and their background...but I am speculating quite a bit tbh.
Re Day to day
I actually interviewed with Hoist though cannot say that I know a lot about the firm. Nevertheless, my impression is that they do mostly unsecured consumer loans. Having said that, I would expect the job to be more about acquiring unsecured portfolios which, in a certain way, does not require a lot of analysis. Cerberus should be a different game as they do a lot of secured transactions (and large ones). Therefore, I would expect the role to be more on the real estate side, spending a lot of time analysing different types of collateral in Southern Europe. As the transactions are larger and more complex, I would expect longer working hours at Cerberus.
My two cents, I hope it helps...
I guess one dynamic that is helpful to understand in the NPL context is the treatment of these loans on bank's balance sheets.
Banks usually think in core capital requirements and return on this capital. Once a loan gets the tag "non-performing" it is worth less in terms of risk-weighted assets that dictate capital requirements and that in turn means less return on capital per dollar invested for the bank.
As a result banks are strongly incentivized to get rid of these loans which can lead to attractive pricing for NPL investors who price these assets completely differently.
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