Private equity firms are on a roll in Europe and have the wind at their backs, but face the challenge of deploying huge amounts of cash at a time when values are high, writes deputy editor-in-chief Robin Marriott.
BC Partners has been a stalwart of the European private equity industry for over 30 years, having been established in 1986, but is now turning its attention to real estate. The company has hired Stéphane Theuriau, previously of French property company Altarea Cogedim, to lead London-based BC Partners Real Estate where he will grow a new team pursuing opportunistic property investments.
BC Partners has not yet said it will raise dedicated real estate funds, but that is the expectation given other private equity groups have previously done so. The Carlyle Group and The Blackstone Group were among the earliest adopters to branch out from private equity funds to raising dedicated real estate vehicles, but more recent examples include TPG Capital, KKR and Apollo Global Management.
One reason why Theuriau would be excited to join the firm is its fundraising heft. In January, the firm closed its latest fund, BC European Capital X, on €7 bn. Although by no means huge compared to some of its peers, it was nevertheless significant for a private equity fund, which is considerably larger than a real estate partnership. It was able to attract capital commitments from 130 different investors.
Around 35% of the equity was from investors in North America, 25% from Europe and 35% from Asia and the Middle East. BC Partners will be hoping to attract an additional portion of equity for its real estate strategy. BC Partners is not the only mainstream private equity firm of late that has been attracting attention for making a concerted push into real estate. US firm Bain Capital, headquartered in Boston, has been making significant inroads. In December last year it completed a deal to take on the real estate investment management team from Harvard Management Co, which invests on behalf of the Ivy League colleges, and in May it emerged as the buyer of a €1.45 bn non-performing real estate loan book from Greece’s Piraeus Bank which agreed to sell it for over 20% of the nominal value. In Europe, such deals by Bain are led by Fabio Longo, managing director of Bain Capital Credit’s European non-performing loan and real estate business.
It would come as no surprise if Bain were to raise a dedicated real estate vehicle in due course, though in an interview following the Harvard team acquisition the firm said it was too early to discuss strategy.
Private equity firms are on a roll in Europe and have the wind at their backs. They are benefitting from record inflows of capital and deal volumes. In 2016, the amount of Europe-focused private equity capital raised reached €109.8 bn, helping to fuel record deal activity. Private equity-backed transactions have increased for five consecutive years.
Indeed, all alternative asset classes have enjoyed rising fortunes. Investment in private equity, real estate, infrastructure and private debt has hit an all-time high of €7.2 tln amid low interest rates that has kept borrowing cheap. At the same time, bonds look less appealing as bond yields have remained low and equities have been viewed as expensive and volatile. So it is no wonder alternative private investment firms are adding new business lines.
Pedro Arias, head of alternative and real asset strategies at Amundi, explains that for many years now, investors have viewed alternatives as something to produce ‘super alpha’ returns and diversification. As such, they have incorporated them into their portfolios.‘Alternative asset managers have tended to pursue one of two business models,’ he says. ‘There are boutique firms with deep experience in a specific market but which lack financial clout. Or there are large global players with strong resources, which ensure they will still be around in a decade when the profit on the investment is realised.’
ECONOMIES OF SCALE
These organisations, he notes, can also generate economies of scale by centralising risk controls. ‘There can also be useful pooling of knowledge across different specialisations such as real estate debt and property management which creates insights a specialist player cannot access,’ he adds.
However, the downside of huge amounts of cash allowing alternatives firms to add more business lines is the difficulty of investing when values are high already. This is why asset managers have been finding new ways to deploy money, says Arias, by teaming up with ‘industrial partners’ for example, that can ‘manufacture assets’, thereby providing managers with an alternative to waiting for assets to be placed on the market.