On an earnings call in February, TPG CFO Jack Weingart said the company was looking to increase its “private real estate credit effort.”
The Texas-sized private equity giant boosted that effort in a major way Monday, when it said it was buying Manhattan-based investment firm Angelo Gordon for $2.7 billion.
Angelo Gordon is in two lines of business. First, it offers credit — financing for businesses, distressed buyouts and private equity firms. Second, it provides debt and equity on real estate assets and holds billions of dollars worth of commercial backed-mortgage securities. The latter business manages about $18 billion in assets.
TPG has traditionally acted in the private equity space, buying up companies through leveraged buyouts. But with the Angelo Gordon deal, TPG will significantly raise its private debt profile, with a particular focus on real estate.
Developers often turn to private credit to score much needed financial lifelines, especially in cases of needed refinancings or cash overruns. And as traditional lenders — including regional banks reeling from the recent failures of Signature Bank and First Republic Bank — back away from commercial real estate, these nonbank lenders are expected to pick up some of the slack.
“The reorganization of regional bank balance sheets [will likely] shift CRE lending from the banking system to private capital at higher spreads,” hedge fund Ellington Management Group said in a March report.
Others agree.
“I think the private credit area is really at a golden moment, because we do see tightening out there and yet we have this large pool of capital to deploy,” Blackstone COO Jon Gray told Bloomberg last month.
TPG is still planning to raise limited partnership funding for its own previously announced real estate credit platform called TRECO, executives have said on earnings calls. But private financing is top of mind for the firm.
“There’s been a pretty massive dislocation in the financing markets in real estate,” CEO Jon Winkelreid said on an earnings call in February. “We’re out in the market right now.”
Representatives for both TPG and Angelo Gordon declined to comment, referring instead to remarks made on calls with investors and analysts this week.
Equity experience
Angelo Gordon’s real estate portfolio spreads far and wide, from a stake in Brooklyn’s $1.3 billion Industry City complex — New York City’s largest privately owned industrial property — to 8,000 apartments across the Southeast and almost 4 million square feet of self-storage properties throughout the country.
In 2018, Angelo Gordon spent $147 million for two office buildings in Chicago. In 2021, it sold an 11-story multifamily building in Maryland for $65.8 million and picked up an office complex in Pasadena, California, for $72.5 million.
TPG may have been attracted to the firm for its experience holding equity in real estate projects, said Sarah McKevitt, a senior real estate analyst at consulting firm RSM. Because Angelo Gordon knows how to operate a stake in a project, it gives TPG expertise in providing preferred equity or mezzanine financing to real estate interests.
“There’s probably a lot of synergies there,” McKevitt said.
After plunging 36 percent last year, commercial mortgage bond issuance plunged to its lowest point in over a decade in the first quarter, according to Trepp. Partly as a result of the slowdown, preferred equity investors have emerged as a lifeline for developers struggling to score financing from institutional players or public debt markets frozen by high interest rates.
“We are seeing increased activity from private capital,” Rachel Vinson, who leads debt and structured finance at CBRE, wrote in a February report.
One red flag analysts have highlighted is that Angelo Gordon’s real estate portfolio might be subject to some distress of its own.
“We will of course want to see incremental details around the Angelo Gordon business such as the breakdown of the real estate portfolio (exposure to office, for example),” JPMorgan’s equity research division wrote in an analyst note.
Opportunity for distress
In the wake of the 2008 financial crisis, few players were in the market for CMBS debt, given the wave of defaults around residential mortgage-backed securities. But Angelo Gordon was one of them.
The firm started opening up funds to invest in MBS deals — in 2011, Angelo Gordon formed AG Mortgage Investment Trust, a public REIT for these types of investments. From then until 2017, the trust purchased $8 billion worth of CMBS and commercial debt, according to an investor presentation.
“Traditionally people knew us as a sharp, distressed investor,” Angelo Gordon co-CEO Josh Baumgarten said on a call with analysts Monday discussing the deal.
TPG is also known for investing in distressed assets — in 2012, the company closed a $997 million credit fund to target distressed assets in the U.S. and non-performing loans in Europe. And in October, the firm’s real estate division closed a $6.8 billion fund to invest in “dislocations caused by capital market volatility.”
Over the last few years, Angelo Gordon has pivoted to becoming more of a standard credit lender — prompting TPG to spend billions to bring the firm into its fold.
“They have a direct lending business. They have the opportunistic business,” Winkerfield said on the call. “This pivot into a kind of a multi-strategy role within credit was something that was very attractive to us.”
Rich Bockmann contributed reporting.