King Street Raises $1 Billion as European Property Cracks Appear

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(Bloomberg) — King Street Capital Management has raised close to $1 billion for a fund to exploit the distress and dislocation that’s finally emerging in European real estate after the end of zero interest rates.

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The firm’s European Real Estate Special Situations II fund reached its hard cap of $950 million of capital commitments within 12 months, according to a statement Monday. King Street has already deployed more than €1.5 billion ($1.2 billion) in European real estate debt and equity since interest rates ratcheted higher in 2022, partner and co-head of global real estate Paul Brennan said in an interview, and the latest fund raise will allow it to ramp up activity further. 

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“We’ve never been more active in European real estate than we are today,” said Brennan, who oversees the firm’s real estate investments in the region. “This is the most dynamic window since the financial crisis. The market dislocation is creating a rare window — especially in Europe’s most liquid cities — to access trophy assets at compelling entry points.”

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Many distressed debt investors who had hoped for bargains in Europe’s real estate correction have been mostly disappointed as lenders proved more patient than expected with landlords in breach of their debt covenants. 

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“We have seen little to no distress,” Charles Favard, head of EMEA real estate in UBS Group AG’s private funds group said. Where it has emerged, it has typically been in asset classes that few investors want such as “stranded office assets in secondary locations,” he said. 

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Instead, King Street has relied on a large in-house restructuring team and a detailed knowledge of the continent’s complex and varied bankruptcy laws to secure rare deals for trophy assets with broken capital structures.

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Today an alternative asset manager managing $29 billion across a range of credit and equity strategies, King Street made its name as a hedge fund exploiting complex bankruptcies such as the collapse of Lehman Brothers since its founding in 1995. It’s now ramping up its European real estate bets with the help of a clutch of new hires including Michael Fuller from Brookfield, Adam Lawrence from Starwood Capital and Ranveer Bassey from Strategic Value Partners. 

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Among the deals it has done since rates blew out are the acquisition and sale of the Bauer Hotel in Venice, an asset that was part of the defunct Signa empire run by Rene Benko, who is now the subject of a criminal probe. 

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King Street bought into junior debt secured against the property, enforced a Luxembourg share pledge to take control and then quickly ran a process to sell it — a rare example of a special situations firm managing to make money out of the Signa bankruptcy. It eventually sold the property for more than €300 million.

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“In the wake of Signa’s collapse, many market participants expended considerable energy chasing opportunities across a complex and unsecured capital stack,” Brennan said. “We identified a single asset where we had real structural protection in Luxembourg and focused our efforts there.”

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King Street sold about 40% of its European real estate book in 2021 as the market boomed. The same year it raised a new dedicated real estate fund in excess of $1 billion but it struggled to deploy capital with prices elevated and almost no distress.

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But as rates moved higher in 2022, the firm’s deployment ramped up as opportunities emerged. About a third of the firm’s global $2.3 billion special situations fund is also now invested in real estate.