Orion Capital Managers: Successful deal hunter vows to quietly follow its own track

Orion Capital Managers’ founders believe their experience of raising funds and sourcing deals in even the toughest times will allow them to remain vigorously independent, reports Jane Roberts

Lately, specialist private equity real estate firms have been selling equity to bigger beasts – AREA Property Partners and Europa Capital to name two – but Orion Capital Managers, named after the hunter of Greek mythology, is one European firm that says it has no interest in being pursued.

Bruce Bossom, Van Stults and Aref Lahham, the trio of principals who founded the firm in 1999, remain resolutely low-key and prefer to let their track record do the talking. “We’re happy with our model,”  says Stults, who adds that they have every intention of continuing their independent ownership. “It’s a question of what gives you access to capital and to transactions, and we feel exceedingly comfortable about that.”

Lahham adds: “The private equity model is based on performance, so if you continue to perform, you continue to attract discretionary capital.” The trio have a reputation as great deal-makers and the firm as an upper-quartile manager. In the dark and difficult days of 2008/2009, they proved their ability to attract discretionary capital for the fourth time with opportunity fund Orion Europe Real Estate Fund III and to keep the same remuneration terms.

A majority of the investors in Orion’s two earlier opportunity funds re-invested in Fund 3 by its first closing in 2008, which raised between €900m and €1bn. Orion then hired the placement agent team at Credit Suisse (and now at Greenhill & Co), who helped push the total to €1.28bn by the final closing in October 2009.

Stults says Fund 3 has 70 investors, about 40% from the US, 30% from Europe and the rest from around the world. Investors in Orion funds include US pension funds and endowments, such as Michigan State University and Colorado Public Employees Retirement Association, Dutch Pension manager Mn Services, and more recently, Australasian investors such as New Zealand Superannuation. Orion is investing for only one other fund, another Pan-European limited partnership, but with a core strategy, which closed in 2007, called Orion Income Return Partners.

A focus on performance

Some of the opportunity funds’ investors are also in this fund. “Our culture is to remain disciplined and focus on perform-ance,” Stults stresses. “It is not a culture of building assets under management.” The firm is based in London’s West End,  but a priority from the start was to open offices in other countries – Paris, Munich (although this office later closed), Milan and, in 2009, Madrid – enabling Orion to rapidly respond to a broad range of transactions.

Lately the deals have flowed, but not in a continuous stream. Orion bought nothing for Fund 3 in 2008 or 2010, but had more success in 2009 and 2011, to the extent that half of the “billion-three”, as Lahham calls it, has now been invested. This time around, they have invested heavily and counter-cyclically in Spain, especially in retail, which they began to target in 2007. This May, they bought a 50% share of one of Europe’s largest retail and leisure developments: the 2.2m sq ft Puerto Venecia in Zaragoza. The project, which is being developed by British Land, is 70% sold, let or under offer and opens in autumn 2012.

Two years earlier, Orion bought one of Madrid’s largest shopping malls, the 753,000 sq ft Plenilunio centre, in one of  its first deals for Fund 3. The €235m price was well below vendor Banif Inmobiliario Fund II’s €279.4m book value, but some still suggested it was high. “Agents said we overpaid, but we got it at a good price and could sell it at a profit now,” Lahham says. “It took a while to warm it up, but now it is 98% leased and we have a waiting list of tenants wanting to come in.”

Stults adds: “It’s not often that opportunity funds can buy a state-of-the-art shopping centre with their cost of capital. If you recall what people were saying about Spain in 2009, underwriting it was a bold decision.” Orion believes good-quality retail will show very good risk-adjusted returns, despite the Spanish economy’s manifest problems and the fact that, according to IPD, capital values are still sliding after three years. The firm is not banking on a fast turnaround of the Spanish market. “We are able to move into illiquid markets; price correctly and execute deals that will make the most money,” says Lahham. “Sometimes, the people who know a market best are the most shell-shocked.”

Betting big in Spain

Their biggest bet on a Spanish recovery could be buying into Inmobiliaria Colonial, once Spain’s second largest property company, which almost collapsed under €7.5bn of debt in 2008. During a second restructuring, in late 2009, Orion joined US distressed debt investor Colony Capital to buy Goldman Sachs’ €1bn share of Colonial’s remaining €4.2bn of debt. The parties have not commented on the deal, but some or all of that debt was converted into equity. It was Orion’s second deal with Goldman Sachs that year. In January, Orion paid the US bank €86m, or €25.5 per share, for a 7.25% stake in quoted French property company Sociétié Foncière Lyonnaise. Goldman Sachs is thought to have acquired all or part of the stake at €35 per share as part of the first Colonial restructuring.

Lahham puts Fund 3’s lack of transac-tional success in its first year down to the time it took straightened investors to accept the direction the market was going in. With a €300m loan from RBS, the team was ready to go in 2008 after a year out of the market. “But there was nothing we could get at the price we wanted,” Lahham says. “It’s human nature – people had a hard time accepting that values were falling.

“By 2009, the people who sold to us were the strongest, like Goldman Sachs and [Banif Inmobiliario owner] Santander. They were the ones who took the decisions to sell and put the money to work elsewhere.” Orion has been equally comfortable pursuing large portfolios over the years, buying into public companies via shares or debt, or buying assets. “Funds 1 and 2 were designed to go under the radar, as there were a lot of people around with money then,” Lahham says. “We reversed this with Fund 3 in terms of strategy and size of deals.”

There have been numerous deals that got away, including a €500m-plus healthcare portfolio Orion tried to buy from Generale de Sante in 2006. In the past weeks, AREA and Delancey appear to have outbid Orion to take London developer Minerva private. Two Fund 3 deals are French investments closed in 2009. One was the SFL stake and the other a 50% stake in Altaréa Cogedim’s 86,000m2 Villeneuve-La-Garenne retail development near Paris. “We spend a lot of time in France but haven’t found a lot of good opportunities,” Lahham says. Stults adds: “There are few problems in France.” In the UK, months of work on potential residential deals paid off recently when Fund 3 bought a site on City Road in Islington with planning consent for 259 flats and potential for further development.

Leading the way into core territory

The divergence from an opportunistic strategy to launch a core European fund was “to serve some long-standing clients and to see everything in the market”, Stults says, and other private equity firms have copied the tactic since. For the Income Return Fund, the team have bought mainly second-tier city retail schemes, and offices. “I think the private equity real estate market is splitting into two: managers that will continue to attract capital and others that may have to restructure to continue to attract capital,” Lahham says.

“It’s a Darwinian time,” agrees Stults. “Investment banks are less of a force, but now we have the arrival of the private equity firms like KKR and TPG. But we think it is a good time for our model, as we have got access to capital. The plan is to stay with the same model – it works for us.” “Hopefully we will raise our Fund 4,” says Lahham. “The KKRs, Colonys and others grew their business organically for years. Why other people bring in other investors is their own business.”

The star performers that helped Orion shine

Orion European Real Estate Fund 1

The fund was launched in 1999 with cornerstone investor Citigroup’s Travelers insurance company and closed in 2000 with €475m of equity. It made 30 investments totalling €1.5bn in France, Italy, Spain, Germany and the UK. These ranged from buying the Radisson  at Euro Disney’s golf course and investing £50m in Palmer Capital Partners’ development fund, to Orion’s first corporate acquisition: a £95m deal to take French quoted company Locafinanciere private. The fund achieved a 20%-plus internal rate of return.

Orion European Real Estate Fund 2

Launched in 2004 with €500m of equity, the fund has a total investment capacity of €2bn. It has invested in France, Germany, Italy, Spain, Sweden and the UK.

Orion Income Return Partners

The 10-year fund raised €200m of equity by early 2007 from about half a dozen investors to buy core property in second-tier city shopping centres, supermarkets and big box retail, mainly in southern Europe, and offices in France, Germany and the UK. It has done six deals, buying two malls this year: 50% of Mongolfiera Molfetta  in Bari, Italy, from Foruminvest for about €60m; and the Allee Center in Berlin for around €50m, from German fund DWS. It tried to buy City offices, taking 131 Finsbury Pavement from IVG for £45.5m, at a 7% yield, in 2009, but losing 21 Lombard Street when the vendor withdrew.