Fresh from winning the work-out of Uni-Invest’s assets, US private equity giant TPG is warming to European real estate and may be set to launch its first dedicated property fund, reports Lucy Scott
For the past decade, TPG has visited Europe’s property sector in a manner befitting any typical US private equity outfit: by stealth and by night – appearing in the background of some high-profile take-private deal or corporate rescue bid and in the guise of a mysterious corporate acronym.
It is hardly surprising that TPG’s forays into property have been few and far between, given that this self-styled contrarian investor found little in the sector to set its heart racing during the bloated mid-2000s.
But all that is about to change. Last week TPG Capital, with partner Patron Capital, clinched control of distressed Dutch property company Uni-Invest, signalling its arrival centre stage.
Back in the 2000s, it briefly manifested on the real estate scene as one of three backers to John Lovering’s deal to take Debenhams private in 2003. But gaining the retailer’s 23-strong property portfolio – including its 350,000 sq ft flagship Oxford Street store was purely a means to an end for the buyer and the assets were sold on to British Land to part finance the £1.7bn deal.
In 2008, TPG appeared again, this time offering a £179m equity injection for ailing British buy-to-let mortgage lender Bradford & Bingley. The deal was driven not by a desire to gain residential exposure, but the prospect of taking a 23% chunk of the UK’s eighth largest mortgage lender, as the credit crunch put a strain on funding costs.
The company, founded as Texas Pacific Group in 1992 by David Bonderman, James Coulter and William Price, is a prolific name in the travel, retail and technology sectors, where over its short life it has honed a reputation for turning down-at-heel firms into lucrative prospects.
It is best known for its founders’ first turnaround job, a punt on ailing Continental Airlines in the 1990s. Over five years, the deal returned the investors checkout profits of $700m for a mere $66m investment. More recently, TPG has helped companies such as Burger King to return to form.
Warming to the property sector
Those close to the firm say that despite its only low-key interest in real estate over the past 10 years, during the past two TPG has been more committed to property on both sides of the Atlantic. Its forays into the sector have become more frequent and strategic – real estate accounted for one sixth of the $6bn TPG invested globally last year.
This change in tack has been largely driven by its limited partners’ and investors’ appetite for property. The majority of its $1bn property investment over the past year has been into US non-performing commercial and residential loans, but TPG is dedicating an increasing amount of energy and investment to the European market. The London office has started to build a real estate team, headed by principal Anand Tejani.
There are two reasons for this change of strategy. First, distressed European property is seen to offer the best potential to make the kind of returns private equity groups have recently been unable to muster in the sector, due to the depth of Europe’s problems.
Second, the recent sovereign debt crisis has forced the company to change its focus, because leveraged buyout opportunities are hard to find now. Late last year, European co-chairman and buyout veteran Philippe Costeletos announced he would be stepping down from his position.
TPG said it would redeploy capital towards non-performing European restructuring and loan opportunities – and where better to shop for such deals than in real estate?
TPG’s initial European explorations have taken time to bear fruit. Its two-year-old venture with Stephen Vernon’s Green Property to invest up to €900m turning around underperforming UK and Irish commercial property is yet to sign its first deal – largely because it is thought that pric-ing in these markets still has room to fall.
The collapse of the venture’s €120m bid for the Royal Liver Assurance Irish portfolio scuppered mid-deal by a turn for the worse in Ireland’s economic health – is a case in point. TPG’s £575m bid without Green, but with Goldman Sachs, for seven UK Mint hotels last summer was not high enough to secure the deal.
But TPG is optimistic about the future and as a firm with long-term ambitions for the sector, it is in no rush. Speaking at a conference in New York last December, senior partner Kelvin Davis said: “While I’m sure there have been some very good deals in the region, the best European deals haven’t been done yet. The level of financial distress is increasing enormously, and is going to increase enormously. The scale of the deleveraging that will have to happen [in Europe] makes what has happened in the US look modest.
“In that process, an enormous set of opportunities will become available even to those investors with higher costs of capital, like us, and to those willing to try to understand local economies and risks. There will be opportunities in both the US and in Europe, but we may see the best in Europe.”
TPG’s European game plan can be seen most clearly in its successful joint bid for control of the 203-strong portfolio of Dutch offices, warehouses and retail in secondary and tertiary locations formerly owned by heavily indebted Uni-Invest (see below).
Downturns aside, it is the type of deal the Fort Worth-based company thrives upon: venturing in where others fear to spend and fixing the operation in question.
Targeting ‘micro asset’ opportunities
TPG believes in recent months real estate investment has been too focused on risk aversion and yield – deals for fully let, institutional-grade properties in safe cities. By contrast, TPG is seeking distressed opportunities offering potential to add value by reletting or refurbishing assets. Davis calls these “micro asset” opportunities, ones based on local market risk.
TPG has found such a challenge with Uni-Invest’s portfolio and is on the hunt for similarly complex opportunities in Europe. However, the firm’s strategy may not be entirely opportunistic. Insiders say TPG derives its equity for real estate deals from a range of sources, with a range of needs; from two- to three-year hold periods to those seeking core-plus returns over longer periods.
TPG has largely funded its property investments through fragmented capital sources, via separate accounts and broader buyout vehicles such as the $15bn TPG Partners V fund and TPG Partners VI, which has $18.8bn of committed capital. But now, for the first time in its 20-year history, the firm may consider raising a fund specifically targeting property.
This new strategy may be behind the hiring of well-known capital-raising gurus. Robert Weaver, former managing director at Morgan Stanley, joined the New York office in October as a partner and member of the investment committee, responsible for capital formation and investor relations for TPG’s global real estate business.
In the same month, Magnus Christensson, former European head of investment bank Jeffries’ placement group, joined TPG’s London-based fund-raising team. Before that, at Atlantic-Pacific, he raised capital for Forum Partners’ €443m third real estate opportunity fund. Other newcomers include former Westbrook Partners managing principal Avi Banyasz, who joined the New York office in January 2011.
Notoriously press-shy TPG will not reveal details of its real estate team (as with its other teams), but London-based principal Tejani is one of the key operators in its European property business. He led the Uni-Invest bid with Patron Capital’s Laurens Feleus, serves on the board of Green TPG and was heavily involved in TPG’s purchase of a $4.5bn portfolio of Corus bank property loans from the Federal Deposit Insurance Commission.
Seeking new partners
The group is on the lookout for more tie- ups similar to those formed with real estate veterans such as Vernon and Patron’s Keith Breslauer, who made his name at Lehman Brothers in the 1980s and 1990s work-ing on US distressed property deals. Such partnerships allow the company to latch on to long-running expertise in the sector.
Despite the fact that TPG’s moves appear to be based on timing the commercial real estate sector’s recovery, its interest is long term, partly because it believes European recovery may take a long time. Others argue that TPG’s new interest in property is down to the vacuum created by the faltering of dominant private equity real estate firms such as Goldman Sachs and Morgan Stanley.
Does TPG want to be Blackstone? The firm is well aware its $50bn of assets under management are only a third of Blackstone’s, yet is determined to fire at the same opportu-nities in terms of complexity and size. The two went head to head for the Mint hotel portfolio last summer and its bid for ING Real Estate Investment Management, the world’s largest property fund manager, perhaps outlined a desire to put on the muscle needed to crush Blackstone’s recent unrivalled dominance. The private equity real estate game looks set to get more fierce.
TPG set to sweat assets in tough Uni – Invest work – out
The properties in Uni-Invest, the indebted Dutch portfolio in work-out which TPG won with Patron Capital against Valad, are in secondary or tertiary locations across Amsterdam, Rotterdam, the north-east and south of The Netherlands.
Some 29% of the 1.1m m2 portfolio is vacant (a handful being entirely without tenants) and the weighted average time until lease expiry is three and a half years. In the ranking of promising real estate recovery plays, the Dutch market is not an obvious contender. In January, DTZ called on the Dutch government to do something about the country’s office property oversupply, which stands at 14%.
But this messy, complex deal is a classic private equity proposition. For €358.75m, TPG and partner Patron Capital get a foot in the door of a portfolio that was once valued at €900m. The deal is structured so that if the sale of an asset exceeds 130% of the allocated loan value then the equity will receive 48% of whatever is made above that.
To achieve this, TPG and Patron have four main asset management strategies: to increase capital expenditure and improve assets; lower rents and increase incentives to attract neighbouring tenants; disposition of properties with more than 50% vacancy rates; and changing the use of some assets to hotels, housing and student accommodation.
Fund managers’ capital raising: Real Estate Capital commentary
Capital raising has been quiet in the first few months of 2012. There is no single strong theme as there was in 2011, when a relatively high amount of equity was raised for mezzanine debt.
The capital that has been raised so far this year is very focused and not much is for core strategies. A theme later in the year will be a very large group of private equity fund managers starting to raise follow-on funds. Tristan Capital raising €420m for its follow-on Curzon value fund and Orchard Street Investment Management £200m for a second UK special situations fund are out in front of quite a crowd.
The other trend will be capital raising for senior debt funds and for more mezzanine funds. At least a dozen managers of all stripes are targeting debt, as European investors believe the case for investing now is strong.
But capital raised to buy non-performing loans is still overwhelmingly American. This year, managers have announced a handful of separate accounts and joint ventures, the largest being LaSalle Investment Management and Quantum Global’s global club, which is for core investments.