Funds targeting debt or other niche areas had an edge in tough first quarter, reports Jane Roberts
Capital raising for UK-based fund managers remained as difficult as ever in the first quarter of this year. “It is still bloody tough out there,” says David Rendall, European CEO of Cushman & Wakefield Investors. This month CWI hopes to get to a first close of around €100m for Scottish Widows Investment Partner-ship’s PURetail fund, which will buy shops in European towns and cities.
There have been a handful of first closes for new European vehicles, most of them with very specialist, targeted strategies. Axa Real Estate kicked off 2011 by garnering €350m at the first close for its senior debt fund, Commercial Real Estate Senior I. Antoine Jozan, Axa Real Estate’s head of investor relations, says both international investors and in-house clients have invested, but will not say how much equity came from the latter. “This fund is attracting insurance investors because debt is a good diversification for insurance companies,” he adds.
Axa has big ambitions for the fund, which is managed by Isabelle Scemama, and hopes to hold a further close in the next quarter. Two mezzanine debt specialists have also raised equity in the past three months. At the end of December, Longbow raised £54m for a property mezzanine debt fund. It was followed this month by Duet Group, which held a second close of £75m for the European Real Estate Debt Fund that it advises. The fund was launched last year with €100m of equity.
Duet raised the additional investment via a £50m listing of Duet Real Estate Finance on the London Stock Exchange and £25m of further commitments to the main debt fund. The flotation, sponsored by Oriel Securities, raised less than the target €100m, but no one else has raised €175m for a European mezzanine strategy yet, although Pramerica is close to a second and final close for its mezzanine debt fund. Duet said the second close was mainly subscribed to by institutional investors from across Europe. Evercore Private Funds Group acted as placement agent.
Axa ups development fund’s firepower
Axa Real Estate also held a second close for its European fund Development Venture III. New investment of €147.5m takes the total equity raised to €377.5m, against a final target of €600m, and gives the venture up to €1.3bn of development capacity, after leverage and reinvestment of proceeds.
Jozan said 25% of the opportunity fund investors were in-house clients and 75% external ones, with the latter figure likely to rise to 85% at the third close at the end of Q2 2011. He said the fund has attracted new capital sources to Axa, which has about 125 institutional investor clients.
Development Venture I, which has been liquidated, returned 18% per year net, while Venture II, which invested through 2004 and 2005, is being liquidated now. The funds buy office developments in big cities. Venture III has bought two London redevelopments, 60 Holborn Viaduct and Bevis Marks, plus a 40,000m2, 78% prelet site in Paris’s western business district.
Invesco Real Estate continued to attract new capital after a strong 2010, holding a first close this quarter for its follow-on pan-European hotel fund. None of the investors in the first hotel fund – which included Generali and Allianz – are among the four that committed €85m to fund II.
The fund’s strategy is similar to that of Invesco’s first vehicle. With a focus on income, it will invest in mid-market, modern hotels near city centres, airports and convention centres. The new fund’s first deal was a €170m sale and leaseback of five hotels in Munich, Hamburg, Frankfurt, Vienna and Salzburg, let on 25-year leases to independent operator NH Hotels. Marc Socker, Invesco’s director of hotel fund management, is hunting for further assets in Paris, Lyon, Barcelona, Berlin and Glasgow.
Two UK institutional fund managers have raised capital in the past three months: Legal & General Property and LaSalle Investment Management. LaSalle has taken in €800m since the start of the year, for one new continental pension fund segregated account and two specialist investment funds operated by the firm’s new KAG.
LGP has had a £42m secondary equity raising for its leisure fund, which has been extended to 2020, and took in a further £117m from three corporate pension funds, for its specialist liability-matching vehicle, the Limited Price Inflation Income Property Fund. Michelin Pension Plan made the largest commitment and the open-ended fund now has eight investors.
LGP offers index linked alternative
Launched last summer, the fund offers defined benefit pension schemes an alter-native to other index-linked asset classes such as gilts or social housing and seeks to generate real yields over 4.5%. It mainly buys property let to government bodies, all on long leases with inflation-protected uplifts.
Its latest acquisition, for example, was two recently-completed buildings in Newport and Swansea, bought for £23.4m in a deal reflecting a 5.15% initial yield. Both are let for 25 years to the Welsh Assembly Government, with annual rent rises capped and collared at 0 and 5%.
The fund also bought a Tesco store on Merseyside, which has minimum 2% annual uplifts on the 24 years unexpired. Business development manager Pete Gladwell says LGP’s UK Managed Fund for pension funds, now worth more than £1bn, was the fastest growing UK balanced fund last year. But demand is rising now for funds owning inflation-linked assets, he adds.
He considers the LPI Income Property Fund to be a “second generation” type of product. “Launching new funds in today’s market is not simply a case of putting out another UK balanced fund that seeks to outperform IPD and slapping a new label on it that says ‘defined contribution’,” he says.
“UK real estate, particularly when teamed with listed and unlisted indirect property and derivatives, can offer highly attractive characteristics to sources of capital and their actuarial advisers: high income yields; strong inflation links; long-dated, contractual income streams; capital growth; reduced volatility; and even liquidity.
“But it is down to us to work with clients and their advisers to identify investment criteria and structures that precisely meet their requirements, particularly distinguishing between the priorities of defined contribution and defined benefits schemes.”