The Real Deal New York

KKR places $1.1B bet on high-risk CMBS

Private equity firm is betting on B pieces
October 12, 2017 01:15PM

KKR’s Matt Salem

KKR is betting $1.1 billion on the riskiest commercial mortgage backed securities, trying to capitalize on new rules under the Dodd-Frank Act.

The private equity firm closed on an investment fund to buy so-called CMBS B pieces. In December federal risk retention rules went into effect, requiring CMBS issuers to keep 5 percent of bonds on their books. Issuers could get around that requirement if they sold off the riskier B notes to an investment firm, if that firm agreed to hold on to them for five years.

The idea is that B piece investors will pay close attention to underwriting, minimizing the kind of reckless lending that toppled the U.S. real estate market in 2007.

“What we determined was there was going to be a need for an increase in capital for B-piece buyers,” KKR’s Matt Salem told the Wall Street Journal, adding that he expects $2 billion worth of B pieces to sell this year. The firm has invested around $225 million in B pieces across six transactions since December.

Rialto Capital Management, C-III Capital Partners, LNR Partners and Eightfold Real Estate Capital are also big B piece buyers, according to the Journal. Despite the new risk retention rules, CMBS issuance in 2017 will likely top last year’s $77.6 billion mark. [WSJ]Konrad Putzier