The news that Angus Dodd is leaving Lone Star to head property company Quintain could signal that attractive NPL deals in the UK and Ireland have become depleted, writes Robin Marriott in his monthly Private Equity Letter.
Turn the clock back to 2009. That year, Ireland set up the National Asset Management Agency (NAMA) to address the serious crisis in Irish banking with a long-term plan to offload €74 bn of real estate. It was in the vanguard of a great wave of non-performing loan (NPL) sales in the UK and Ireland by government-owned asset managers and other financial institutions.
That was also the year that Angus Dodd joined Lone Star Funds to head up acquisitions in the UK and Ireland. The firm went on to become a huge buyer of portfolios from the likes of NAMA and it has continued to do so until very recently.
So, news on 15 June that Dodd was leaving Lone Star to become chief executive of a company Lone Star bought last year is worth considering. My theory is that while this is a great opportunity for Dodd to be in charge of property company Quintain, where he has been doubling as chairman, it also suggests that some key figures in the market believe that attractive NPL deals in the UK and Ireland have become depleted.
Indeed, Dodd said as much during a panel on European investing at an event organised by the ULI in May before news of him becoming CEO of Quintain became public. I am pretty sure that if Dodd gave an interview today to highlight UK and Ireland deals he would mention recent transactions by NAMA to sell two portfolios. These two portfolios, named Project Emerald and Ruby, with a combined value reported to be €4.7 bn were, tellingly, not acquired by Lone Star or Cerberus, which had been neck and neck in terms of successful bids on large NPL portfolios. Instead, they were apparently heavily outbid by Oaktree, news of its purchase of the portfolios broke on 9 June.
Another strong year?
If one looks at reports on the UK and Ireland NPL pipeline, one does not immediately get the strong impression that volume has dried up. For example, in KPMG’s 2016 European Debt Sales report, the professional services firm talks about 2015 being ‘another strong year’ with more than €104 bn closed in 30 European countries, with ‘hotspots’ including the UK and Ireland as well as Italy and Spain.
KPMG further explains that £30 bn was recorded in the UK – a record high, fuelled by the sale of UK Asset Resolution’s £13 bn Project Granite to Cerberus, the year’s largest single trade. Of course, no one yet knows what Brexit means for NPL trades. We do know that over the past five years, the bad banks in Ireland and the UK have made great strides in winding down. But there is enough left to keep volumes high. NAMA has, so far, realised €18.7 bn – 39% – and will keep going until 2020.
There is a clue as to what the likes of Lone Star have been seeing of late: KPMG says The Royal Bank of Scotland and Lloyds Banking Group have substantially completed Irish deleveraging. ‘Similar to the UK, Ireland’s deleveraging has now shifted from larger commercial real estate and corporate loans to residential mortgage NPLs, granular CRE/small and medium sized enterprises NPLs...Intense competition between buyers for portfolios in the UK and Ireland since 2013 has led investors to turn their eyes southward toward the recovering economies of Spain and Italy for acquisitions.'
Platform building
Dodd at Lone Star must also have been seeing this trend and has voted with his feet. It is also worth noting that buying Quintain at the end of 2015 for what Lone Star considered a cheap price is a great example of how some opportunity funds have been playing a heated property market. Some private equity real estate firms have found value in platform investing – buying, creating, bolting together and restructuring property companies or operating entities. Property markets have been awash with capital in certain markets and for some assets which is why the strategy has played out. More is likely in the private rented (PRS) and student accommodation sectors.
At Quintain, Dodd is leading the strategy for a portfolio that involves a big London PRS scheme. The next phase of the Wembley Park development will see new and affordable homes for sale and rent through Tipi, its PRS management business.
Given the importance of any project to create residences in London, Dodd has an important mission on his hands with Quintain. That his mission no longer involves NPLs in the UK and Ireland is also an important indicator of a downsizing trend in that part of the market.
PropertyEU columnist Robin Marriott is the former editor of Private Equity Real Estate