Irish state pension fund teams up with KKR

Ireland Strategic Investment Fund (ISIF) and KKR Credit have joined forces to establish a €500m lending vehicle that will finance house-building schemes in Ireland, the firms said in a joint statement.

ISIF backed Activate Capital with €325m, while KKR Credit invested the remaining €175m. ISIF was established in June 2013 to replace the National Pension Reserve Fund and the new joint venture is its largest investment to date.

Activate will back residential housing projects with loans for up to 90% of the total financing requirement and focus on both medium- and large-scale developments. The firms said the vehicle has the capacity to finance more than 11,000 new houses in the country.

Loan sizes will range from around €8m-€50m, a source told Real Estate Capital’s sister publication, Private Debt Investor.

The one-stop transactions, similar to unitranche or whole loan facilities, will have tenors of between three and five years covering both the planning permission and construction phases, it is understood.

Activate will concentrate on new projects but has the flexibility to do refinancing, a source said. It will seek to finance projects in urban areas where there is demand for new housing and is likely to back house or mixed house and apartment development projects, rather than apartment-only construction.

The firms declined to disclose Activate’s return targets, but bank financing for real estate development, where available, is capped at around 65% of the financing cost with margins of between 6-9%. Private equity financing costs between 15-20%, and a source said that Activate loans will be priced to match the risk.

The new platform has held discussions with developers about potential deals but has not yet stuck any financing agreements. It will seek to work with developers with experience in both land acquisition and construction and is likely to find itself working with developers whose assets ended up being held by Ireland’s bad bank, the National Asset Management Agency (NAMA).

Activate will originate, execute and manage its own portfolio with financing for deals coming from a newly- established vehicle seeded by KKR and ISIF.

The new vehicle was proposed to ISIF and KKR by Capnua Corporate Finance and Dan O’Connor, the former chief executive and president of GE Consumer Finance and former executive chairman of Irish bank AIB. O’Connor has joined Activate Capital as chairman.

The joint venture has an investment period of two to three years and a lifetime of around 10 years. But KKR hopes that the platform will prove itself a strong lender and continue beyond the initial agreement.

“The ambition is for [this vehicle] to become permanent … and to cement the partnership,” Robert Gallagher, a director at KKR Credit, told PDI. Gallagher is set to take on the role of chief executive at Activate.

Ireland’s construction sector collapsed in the wake of the 2008 financial crisis when the country’s banking sector had to be rescued with around €64bn in government bailout funds.

The banks had accessed short-term money markets to finance a construction and house-price boom in the run-up to the crisis. As markets closed in the wake of the collapse of Lehman Brothers, the Irish banking sector was left dependent on emergency loans from the European Central Bank and the Central Bank of Ireland.

Irish house prices fell on average 60% from their peak as bank lending dried up and the economy entered a severe recession.

As well as generating returns, ISIF is also intended to boost the Irish economy. The fund projects that by boosting the construction industry, Activate’s activities could generate around 1,900 new jobs a year, thus meeting the state-controlled pension fund’s dual mandate.