Venn Partners – Bringing a plan together

Venn Partners is raising its first real estate debt fund, working with the UK government to deliver PRS loans, and writing Dutch home mortgages. Daniel Cunningham meets the team to discuss its various business lines.

Along-planned property debt strategy is coming together at Venn Partners, the London-based investment manager turned real estate lender.

Venn’s commercial real estate lending business began in 2013. Initially, it channelled cash from its financial backer, the Norwegian conglomerate Siem Industries, into property loans. Now, the firm is honing in on a £250 million final close of its first comingled CRE debt fund.

Meanwhile, the firm is hoping to seal its first private rented sector (PRS) financing as part of a UK government-backed initiative, while also originating residential mortgages in the Netherlands through a platform which was launched in March.

Paul House, Gary McKenzie-Smith and Beatrice Dupont
Paul House, Gary McKenzie-Smith and Beatrice Dupont

“We are trying to step into some of the performing and asset-backed loan spaces where the banks have stepped back,” explains Gary McKenzie-Smith, one of the firm’s co-founders.

Venn Partners began life in 2009 as an investment management company founded by former Goldman Sachs banker McKenzie-Smith and ex-Credit Suisse man Jonathan Clayton. “Initially, we aimed to acquire and manage debt portfolios from deleveraging banks and we kept seeing opportunities to invest in performing real estate debt,” explains McKenzie-Smith.

The move into real estate loan origination began in 2013 with the creation of CRE lending business Venn Finance. Paul House, the former head of Citi’s European real estate business was enlisted to lead the strategy. Joining with him was Citi colleague Beatrice Dupont. “We had decided to create a debt fund. Venn had seed capital and good people so we decided to link in with them,” explains House.

“Banks were paralysed and there were a number of ex-bankers looking to establish debt funds but sourcing capital was a problem,” Dupont remembers. “We were attracted to Venn because they had secured capital. It allowed us to test the market and establish a track record as asset managers.”

Since 2013, Venn has written £1.2 billion of real estate debt across 28 loans, mainly in the UK, France and Germany. At first, loans were originated on behalf of segregated mandates for Siem and a North American pension fund, which House and Dupont had worked with at Citi.

The co-mingled debt fund – Venn Commercial Real Estate Fund I (VeCREF I) – is the test of Venn’s ability to raise capital in the wider market. A seed portfolio of £55 million written for Siem was included to support a £155 million first close by last August. By January’s second close, £185 million had been raised, mainly from UK and North American pension funds. A final close is targeted for the end of Q3. So far, Venn has deployed 84 percent of the capital through loans written since VeCREF I’s launch.

“Once we had established our track record, we were able to raise discretionary capital and deploy that capital into attractive opportunities for our investors, partly into a seed portfolio which had been originated previously,” says House.

The debt fund’s offer is essentially to provide flexible finance in return for more margin. Like other alternative lenders, Venn’s model allows borrowers with plans to reposition value-add property to get finance on flexible terms. The result is a portfolio with varying risk profile, including some loans without prepayment penalties. High single-digit returns are being achieved, the partners say.

“We think the current environment is favourable for lenders like Venn who are able to provide flexible, tailor-made financing solutions to borrowers in exchange for a better return than the more traditional lenders,” explains Dupont.

VeCREF I typically provides whole loans of £5 million to £50 million, up to a maximum loan-to-value of 80 percent at loan level and a targeted 75 percent LTV across the loan portfolio. The fund has the ability to provide bridging loans, medium-term finance and some development funding. To date, VeCREF I is invested in UK property, although a Dublin deal is in the pipeline to bridge the planning process for the redevelopment of a city centre asset.

Venn is not alone as an alternative provider of flexible, higher-margin finance, but House argues that there is plenty of scope for Venn and its peers to operate: “We need a marketplace which provides institutional capital to borrowers. The industry has been focussed on banks, but banks are heavily regulated, so a broadening of capital creates a healthier sector.”

Multi-family finance

An area in which Venn is aiming to make its mark is the UK PRS sector. In 2014, it was selected to partner the government on a PRS finance initiative. Venn will agree to provide investment finance to developers of multi-family product in order to help them source and eventually refinance development loans from other lenders. The government is prepared to guarantee up to £3.5 billion of bonds which will fund the loans (see panel p.23).

It has taken time for Venn to prepare the bond platform and the firm is only now at the stage where loan agreements can be made. A first agreement is expected to be sealed this summer, with £150-200 million of bonds to be issued in order to fund the loan after it has been approved. Applicants then have until the end of 2017 to reserve their slice of the £3.5 billion.

“PRS is still an industry in its infancy,” says Richard Green, a partner at Venn with a background in JP Morgan and Fitch Ratings’ securitisation teams. “Medium-term we see it becoming a stand-alone asset class like student accommodation, but it is ten years behind that.”

Venn’s role, Green explains, is to be an “enabler” in order to help grow the financing market behind PRS. “The market has grown over the last 18 months and its debt finance needs are going to grow with it. Not everybody wants to lend against this asset class, so it is healthy to have non-bank lenders enter the market. We can provide finance up to 30 years; not many in the UK are willing to do that.”

The bonds which will fund the loans come with a government guarantee, meaning minimal credit risk and a stream of funding which makes Venn competitive in the market. Of course, Venn’s success in this initiative depends on the willingness of lenders to provide the actual development loans which it will then refinance.

Dutch mortgage platform

Another sector which Venn took an early interest in is Dutch residential mortgages. In March, it launched Venn Hypotheken, a home loan origination platform which the partners hope will become a household name in the country.

A network of 2,000 financial intermediaries has been enlisted to drum up business. So far, ten mortgages worth around €2 million have been advanced, with €10 million of applications being received each week. By 2018, Venn hopes to be writing €2 billion of Dutch mortgages per year, capturing 3 percent of the market. As much as €750 million of business is expected this year, followed by €1.5 billion next year.

“We want to be competitive in the high LTV, low LTV and NHG [government-guaranteed] sectors. How we raise that capital is a combination of managed accounts, fund structure and RMBS notes,” explains McKenzie-Smith.

Venn’s first foray into Dutch mortgages was the 2014 purchase of a €500 million book of home loans from GE Artesia Bank, which it eventually financed through the first publicly-placed non-bank Dutch RMBS, Cartesian 1 SA. Today, Venn has a team operating in the Dutch city of Breda under Marc de Moor, the former executive director of Belgian bank Argenta.

“We liked the Netherlands for numerous reasons,” says McKenzie-Smith, “it has a deep underlying credit market, normalised around €60-70 billion per year, and it performed well through the crisis. A lot of foreign bank lenders withdrew to focus on domestic markets, so that created a lack of supply in spite of the significant demand. We saw the need for a challenger lender.”

How Venn’s PRS scheme works

In September 2012, the UK government announced £10 billion of debt guarantees to support new housing development, including £3.5 billion for the private rented sector (PRS). Completed properties with a value of at least £10 million are eligible.

Venn’s role is to originate and manage the loans and develop a government-guaranteed bond programme to fund them. The loans and bonds are handled by subsidiary PRS Finance PLC.

Successful applicants will receive a non-binding commitment letter with which to satisfy prospective development finance providers that an investment loan is ring-fenced in order to refinance the property once it is built. All loans must be agreed by the end of 2017 and Venn will provide the funding once the schemes are built.

Bonds are to be issued per loan but can be bundled together by maturity. The government guarantee means that the bond essentially acts as a single-tranche mortgage-backed security.

In April 2015, the bonds to be issued under the scheme were awarded a provisional Aa1 rating from Moody’s Investor Services and the first bond issue is expected to be launched this summer.

Selected Venn loans

December 2015: Provided £9m to finance FORE Partners’ acquisition of London Scottish House in Manchester ahead of its office redevelopment.

October 2015: Venn made a £42 million senior loan on CNM Estates’ Tolworth Tower in Surbiton. The loan included a £31 million acquisition loan and £11 million

April 2015: Provided £13.75 million to finance Meyer Bergman’s £20 million purchase of Thames House, London, ahead of its mixed-use redevelopment.

November 2014: Provided £97.5 million to private housebuilder HUB to fund the construction of the 360-home Hoola-London development at London’s Royal Docks.