03/13/2009

Penner Setting Up 2 Debt Funds for CBRE

The game plan of securitization pioneer Ethan Penner, who joined CB Richard Ellis Investors last spring, is starting to emerge.

Penner is seeking to raise $1 billion of combined initial equity for two open-end funds that would originate and buy commercial mortgages. The high-yield vehicles would each use about 50% leverage, giving them combined investment power of $2 billion.

The vehicles will have differing risk profiles. CBRE Capital Partners would shoot for a return in the low teens, mostly by originating conservative mortgages on stable commercial properties with strong sponsors. Loan-to-value ratios would range from 55% to 75%. CBRE Capital Partners Special Situations would seek a 15-20% return, primarily by originating higher-yield mortgages, with loan-to-value ratios exceeding 75%.

Both funds would also have the capacity to buy senior mortgages, mezzanine loans and commercial MBS in the secondary market. The special situations vehicle likely would focus on distressed debt, which offers higher potential returns.

But the vehicles will emphasize originations. "Ethan's idea is very much to create a new premium brand of lending," said one rival debt-fund operator. "There's no doubt he's trying to compete against the biggest names in the industry. He truly does believe he can build a premium brand to replace some of the biggest names" driven out of the market by the downturn.

CB Richard Ellis Investors, which already operates several other fund series, declined to comment on the new vehicles, but market players said each has a $500 million initial equity goal. The marketing campaigns come at a time when fund operators are having an increasingly hard time attracting investors. CBRE isn't using a placement agent. It's unclear when the vehicles might start investing.

The funds mark something of a return to the limelight for Penner, who played a big role in the development of the CMBS market while at Nomura in the 1990s. Under his direction, Nomura became the first major lender to actively put its money at risk by originating loans and then holding them on its books until securitization.

The strategy led to huge profits for Nomura and was rapidly copied by the rest of Wall Street. Nomura grew into the largest commercial real estate lender in the U.S., driving up Penner's profile in the industry and turning him into one of the highest-paid banking executives. But when the bond market plunged late in the summer of 1998, Nomura suffered big losses on its $8 billion inventory of commercial mortgages. The real estate operation was shut down the following year.

After leaving Nomura in September 1998, Penner kept a lower profile, working on independent ventures for several years. In March 2002, he was named president of Beverly Hills real estate firm Kennedy-Wilson, but left six months later. He subsequently was a principal of fund operator Lubert-Adler Partners of Philadelphia.

Penner, one of a number of CMBS veterans looking to set up their own origination shops, joined CBRE last spring as an executive managing director. He quickly hired former Nomura colleague Frank Scavone to help him set up the debt funds. Scavone previously was an executive vice president at lender Ciena Capital of New York.

Last year, Penner wrote a series of op-ed commentaries in The Wall Street Journal outlining steps he felt were necessary to revive the securitization market. One of his predictions was that securitization shops would have to retain the junior pieces of their loans going forward.

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