This month, Tristan Capital Partners closed its fifth value-add/opportunistic fund, European Property Investors Special Opportunities 5, with €1.7bn (£1.5bn) of capital. It caps a highly active period for the fund manager, which a year ago sold a 40% stake to New York Life Investment Management affiliate Candriam Investors Group and last July took in €1.4bn to its latest core-plus fund (which is now an open-ended product).
EG caught up with co-chief executive and chairman Ric Lewis to talk about how life has changed since the corporate deal, where the new capital is going to be deployed and the increasingly difficult task of providing strong returns later in the cycle.
Was the fundraise harder this time because of the timing?
We are pleased to say it went rapidly and we have a pretty good following with existing clients – with the majority taken up by them – and we had curated and built a good following from those not included in the last fund, too.
After three months of opening, all the capital was spoken for and we were about 100% oversubscribed. It is normal for investor board approvals to take up to six months, but as long as there is capital to commit and invest it doesn’t matter if the tail takes a little longer. It took about nine months but we had certainty of size a long time ago.
We had to make a call as to how much to raise, given where we are in the cycle. I still think there are opportunities but we are now in a cycle that is trying to age gracefully. We want to build an “all weather” portfolio for whatever might come as we can’t tell what is going to happen.
How do you do that?
It is a matter of shaping the portfolio to be good, institutional quality and in some cases taking on less risk on average for a little less return.
And that has been reflected by your return target?
We have told clients that there is a difference of 200-300bp in return for the same level of risk [12-14% as opposed to 15%-plus]. That’s what we marketed to them and they still wanted that. I think they realised that although we were marketing a different story from some mangers, ours resonated with them as being closer to reality.
We are targeting 12-14% on the portfolio as a whole but that doesn’t mean every deal has to be that. I am happy to do deals with 9% or 10% returns where I think I am getting good value and it makes sense, but I will want to get paid when I am taking on more risk.
Would you say that fundraising conditions in general for real estate are still positive?
What has been going on for a couple of years is that everyone is searching for yield and they can’t find it in equity or fixed income. There is an appetite for alternatives and real estate is enjoying a high cyclical popularity.
If you look at the different regions, I can’t call what is going on in the US or Asia but Europe still looks, relatively speaking, like it has more legs. They are also attracted, opportunistically, to the dislocation in Europe that might be brought on by Brexit, or Frexit or whatever.
How has the deal with Candriam changed things at Tristan?
It hasn’t really changed life at Tristan at all. The clients and those closest to us will tell you nothing has changed. They have been a spectacular shareholder and investor and have done everything they said they were going to do. They have supported, clapped and asked questions about how they can help.
To our credit, we have also outperformed all their metrics on fundraising, investment pace, client diversification and customer satisfaction.
What has helped intangibly is that we were previously considered a high-performing boutique, but now when we are dealing with the largest sovereign wealth funds and institutions around the world as investors they know we are not just sharp-shooters but have an AAA-rated parent and that brings something extra.
Candriam has invested €50m each into the two latest funds. They have the appetite to do more, but we have the client appetite so it’s not needed. They have skin in the game as well as management but it is not so much to push clients out.
Your latest core-plus fund, Curzon Capital Partners 5 Long-Life, is an open-ended structure rather than being closed-ended like the previous four. Why is that?
The past four funds in our core-plus series have averaged €400m-€500m of equity. We buy it, fix it and sell it but we then have to return the capital. Clients said to us, “You’ve been doing this a bunch of years; why do you keep going through it every time doing the same thing? You do a good job, you invest it, give us a return and then keep giving our capital back ever more quickly with a new fund.”
We said they were right: it does incur more organisational cost and marketing. We decided that this way we could save time, effort and cost and that in turn we would pass back savings in terms of fees and promotes.
Clients also came to us and said, “You know Blackstone is going to do this, right? You have the four-fund, 15-year track record. Why aren’t you doing the same thing?” That was the final straw.
We have now committed half of the €1.4bn raised once we shut the hatch. We are not in a rush but if we keep going at the same rate we will probably reopen towards the end of this year.
Your most recent purchase was in the UK – a 440,000 sq ft mixed-use logistics and office business estate in Leamington Spa for £34m. Any concerns about investing in the UK so close to Brexit?
I don’t know the answer to the politics. If there were a situation where I knew, to use a ridiculous example, that the UK was leaving the European Union with China as a strategic partner backing it, you could sit there and think, “What does that mean for real estate?” But what I see is, “I am leaving, I don’t know where I am going or the terms of my divorce.”
I am going to let the end of the world take care of itself and focus on what we can do, and invest in what has decent underlying value that can weather a capital markets and economic storm for a while, as that’s what I think we will go through.
I don’t think it’s the end of the world, as it wasn’t in 2008 with the financial crisis and as it wasn’t in 2000 with the tech bubble. I think there is going to be more of a malaise – a 0-0 game with both sides declaring that they won. We can figure it out from there.
I do not think this is good for UK plc or the UK economy, though, and I believe there will almost certainly be a slowdown and that the capital markets will be stilted and institutions will be less free to act, with many sitting on at least one hand.
We think about all that when looking to extract value. I don’t have a crystal ball but I know it is OK for me to take measured bets across a pan-European portfolio.
Are you concerned about a broader slowdown in the property market across Europe, given how late we are in the cycle?
We are not afraid to go back to our long-standing client base and say we see no fundamental value so we are going to go slower or return capital. That hasn’t happened since 2004/2005/2006, when we said it didn’t make sense and they said fine, good decision. Will it get to that again? I don’t know, but I’m not afraid of it.
We will do what we have to do because our job is to be great stewards of capital. If there is the potential of investing bad money after good, we won’t do it.
That’s not the case now, but is it getting harder? Yes, it gets harder every day, and I am trying to normalise that in the team. It feels twice as hard because it is harder. It means you need to keep trying harder, saying no to more things and only saying yes to a few things.
To send feedback, e-mail david.hatcher@egi.co.uk or tweet @hatcherdavid or @estatesgazette
