Private equity boutique builds bridge to span financing gap

Banks’ reluctance to fund residential developments has created an opening for private equity firm  Beaubridge, which has funded four London projects and is looking for more. Jane Roberts reports

Beaubridge is a boutique private equity firm that likes property deals. It focuses on sectors including financial services, healthcare, communications and retail, but four of its 17 different investments have been in London residential developments and this year, Jonathan (known as Jonny) Seal joined from CB Richard Ellis as a fourth partner. A typical investment is £5m-£10m and the partners put in 10% of their own money, “so we’re eating our own cooking” says Diarmid Ogilvy, a founding partner of the firm, which was previously called Partners Capital One. Beaubridge has no fund but works on a deal-by-deal basis, putting opportunities to  around 50 investors so far: wealthy private clients, but a couple of pension funds too. One close partner and investor is property investment manager Mayfair Capital Partners. Mayfair’s MC Special Opportunities fund (now renamed MC Property Growth Fund 2, see News) invested with Beaubridge and its investors in 2 Hyde Park Square after Mayfair made the introduction to the project’s developer, Liberty Properties.

The project is a refurbishment including a new facade of a seven-storey, 1960s building on the corner of Hyde Park Street and Connaught Street that was most recently serviced apartments. It’s no oil-painting, but Seal says “investors like the address”. Some 20 of the 36 flats have been sold at £1,450-£1,650/sq ft – far cheaper than the nearby Lancaster Gate Hyde Park scheme – valuing the scheme at nearly £70m. Beaubridge and Mayfair invested £5m, with £3.8m from Beaubridge, structured as a loan with a second charge after Barclays, which provided £25m of senior debt after the original bank pulled out; plus a profit share. “The loan and coupon take care of any downside and the profit share is the upside,” says Ogilvy. The pair have just exited the investment, generating a 25%-plus return in 12 months, after Liberty exercised its right to buy them out. “Our deals are all about laying off risk,” Ogilvy stresses. “Structuring is incredibly important to us, as private equity is risky.”

It is not easy to pick winners; he estimates the partners looked at 140 deals last year. But one way for them to keep a grip is to use their corporate finance, accounting and operational expertise alongside the managements they back. Since August’s plunge in equity markets, the equity risk premium has risen; Ogilvy says they now want a projected 30% internal rate of return to back most deals, especially as they mainly back small companies. Of the other three residential development deals, it has exited one already and two are at the planning stage, again in partnership with Mayfair. Lots Road in Chelsea is a land play and they provided developer BMB Property with £6.8m in March to buy the site, which is next to gasometers. The density of permitted development will depend on a potential change of zoning but the aim is to get consent for a tower block.

The third scheme is a housing project in Wandsworth, backing Nick Herrtage’s company, Chester Row. Seal sees opportunities for more property deals, at a time when “banks are still hurting and property, especially residential development, has been a dirty word. Banks that will lend won’t do so at 80-85% loan-to cost-ratios, as they would before, but at 50- 55%, so there is this great equity gap. “They are not there for deals without consent, which are many of the best deals. Plus some banks have come back and renegotiated heavily, leaving a sour taste.” Chester Row first showed interest in the Wandsworth site last year, since when “three bidders fell out as they couldn’t get finance”. Seal believes the prime residential shortage will continue for a couple of years, creating “a window now for doing these deals”.

A little further down the line there is the potential for very large schemes in central and west London: “The Shell Centre, St George’s Lots Road, Chelsea Barracks, Battersea Power Station and Earls Court.” Ogilvy admits Beaubridge’s 17 investments include “one or two tricky ones”, but not the five exited since the company set up in 2005 and none of the property deals. Its two earliest exits, healthcare company Endoart and leisure operator World Challenge Expeditions, returned around 4-5 times and 3 times equity, although in easier times. But he points out: “You can’t put money in the bank now, as it’s losing 4.5% a year.” If anything, he expects Beaubridge will aim to do larger size deals, “£10m-£15m regularly, rather than £5m-£10m. A £2m deal only pays for itself if it’s a stonking investment.”