US investment bank Bankers Trust has sold a staggering $1bn of US loans and assets to invest in Europe and the Far East
Bankers Trust’s European real estate team has a reputation to protect: spotting the big trends early and staying ahead of the competition. So far, it has been successful in setting the pace.
The latest big idea is direct investment in niche property companies. A fashionable idea as it happens, but BT was there early, making its first investments in UK companies Value Retail and Principal Hotels in 1994.
More recently, it has led the wave of similar deals on the continent, starting with the acquisition of a 16% stake in quoted Spanish shopping centre developer Filo. It made the purchase last November, investing $9.7m for a 16% share of the equity alongside the Canadian Caisse de Dépôt et Placement du Québec. A further investment in Filo is due to be concluded in the next few weeks.
Since the first Filo deal, BT has invested in 10 companies in France, the UK, Sweden and Belgium, with a combined value of around $1bn (see panel). BT’s investment in the deals amounts to some $250m, says vice-president Derek Vago.
The objective is to seek out quoted or private companies that have strong management in specialist markets. In the most recent deal, BT teamed up with fellow US investors Apollo and Pelham Partners to pump $100m into serviced office operator Regus.
“It’s a great business,” says Vago. “They’ve got around 150 centres now; they plan to operate more than 350 in two years’ time.”
BT and its partners have a 17.5% share in the business; US banking regulations prevent it taking more than 40% in such deals, but in any case, the aim is not to become majority shareholders. “We never want to control a company. We want to bring in the money to complement the management,” says Vago.
Such investments are generally undertaken with a three to five-year horizon. In the case of privately-held companies, the likely exit strategy is an initial public offering.
The benchmark annual return for such investments is “always in the 20s, some may be in the 30s” he says.
The direct investment business is one of four business areas that the European real estate team is focusing on: mergers and acquisitions advisory work, arranging debt finance and securitisation, and sourcing equity capital are the three complementary strands.
In the first nine months of the year, these four businesses handled transactions with a gross value of some $2.8bn, says managing director David Brush.
Brush is relatively fresh off the boat, arriving in London from BT’s New York headquarters in May to head up the 17-strong European real estate team. His appointment provoked a power-struggle within the London-based team, which ended with the abrupt departure of Richard Mully, the high-profile managing director. Mully was widely credited with being one of the leading innovators in the Bankers Trust real estate team.
However, the BT team is an eclectic mix of strong individuals, and while the loss of Mully will undoubtedly be felt, observers believe it is not a body blow.
The team has notched up many successes, but it hasn’t all gone BT’s way. The bank bid unsuccessfully on both of the big UK government property privatisations of the last two years – the Ministry of Defence housing and the offices of the Department of Social Security.
The consortia of which it was part lost out to teams led by its rivals Nomura and Goldman Sachs. BT picked up some of the MoD houses in a subsequent deal with Nomura, last summer.
Understandably, BT is less enthusiastic than it used to be about the government’s private finance initiative, but it has not abandoned the sector entirely. “We are careful, but we have not been put off; if the right opportunity comes up, sure we’d look at it again,” says Vago.
In the immediate term, Bankers Trust is setting more store by the private sector equivalent of PFI: advising and participating in the move by large corporations to shift property from their balance sheets and into the public markets.
BT is already staking out a role for itself in this nascent market, advising Spanish telecoms giant Telefonica on the flotation of its 3.5m m2 of real estate.
In Sweden, it has taken a direct investment stake in a similar deal, the sale by telecoms company Telia of its 1.2m m2 portfolio. And in Italy, it is on the shortlist of companies bidding to advise Telecom Italia on the future of its mammoth portfolio.
BT plans to expand its European equities capabilities to service this market. It strengthened its hand considerably at the end of last year, with the acquisition of Natwest Markets’ European equities operations. Around 150 bankers, dealers and analysts joined BT Alex Brown, the equities subsidiary of BT. The aim now is to grow the business from its UK base.
“This will put us in a position to handle continental IPOs. My own view is that this is going to be a big business over the next two years as more and more property owners look to the public markets,” he adds.
BT has also flirted with central Europe, taking a 10% stake in Polish developer Globe Trade Centre over the summer. The company’s principal scheme is the Mokotow Business Park south of Warsaw. An innovative plan to securitise the income from the leases has remained on the drawing board because of the economic and stock market uncertainty in the region. The idea has not been abandoned entirely, says Brush.
Further afield, BT is putting some serious money into distressed real estate debt. It’s a market the bank understands well, having invested heavily in the loans sold off by the Resolution Trust Corporation in the US. In Europe, it was, arguably, the linchpin in the effort to reintroduce liquidity into the stricken French property market.
Back in 1994, the bank played a key role arranging the ground-breaking defeasance structure that took FFr 9bn of bad property debt off the balance sheet of French bank Le Comptoir des Entrepreneurs.
The following year, it advised Barclays Bank on the first sale of distressed property debt in France. The deal opened the floodgates for largescale disposals by French institutions of non-performing property debt, and BT went on to advise on all the major transactions.
The French bad debt market is “pretty well played out” says Brush, although possibilities to do similar transactions still exist in Italy. But the real focus for distressed debt has now switched to the Far East, Japan in particular.
BT has formed a joint venture called Jamico with General Motors’ investment operation GMAC and US real estate company LNR Property. Together they have bought three loan portfolios since the end of last year, with a book value of more than $1.5bn, paying less than 10 cents on the dollar.
The handful of deals done by BT and other investment banks so far have barely scratched the surface of the market; estimates suggest there is between $700bn and $1trn of bad property debt in Japan alone. The financial crisis in the Far East has not deterred investors into this market. “The volume of bad debt in the Asian market is twice the size of the US,” points out Brush, “so people are looking at the deal flow.
“And what’s really compelling,” he adds, “is that the discount [borrowing] rate is just 25 basis points.” Loan portfolio acquisitions are typically geared at around 60%.
The flow of investment into the Far East will not be at the expense of Europe, says Brush, but at the expense of the US.
“We are still making select investments in the US, but our total exposure, including leverage, is around $1bn, down from $2bn just a year ago,” says Brush. Most of this exposure is in the form of property loans, where new terms have been agreed with the borrowers and the loans sold on or securitised, or the property repossessed and sold.
“The US market has recovered and is now fairly valued. It’s time for opportunity, value-oriented investors like ourselves to sell,” says Brush.
While BT is not a net seller in any part of Europe, the UK, France and Spain are already “recovered” or “recovering”. The bank will be looking to Germany and Italy for the next big deals. It is close to its first transaction in Germany, buying an industrial portfolio.
“We always have to be addressing what the needs of the market are, and where we think there are opportunities.” There is certainly no shortage of enthusiasm. “Europe is a dynamic environment with a lot of changes going on. There is still a lot of growth that’s going to occur,” he adds.
Direct investments – highlights
November 1997 Invests $9.725m in quoted Spanish shopping centre developer Grupo Filo, for a 16% share of the equity. Plans further investment this year, making Filo the main vehicle for BT’s expansion in Spain.
April 1998 Acquires a 40% stake in private Belgian company GL Trust for an undisclosed sum. The company, controlled by entrepreneur Ghislain Lenaers, owns 120 retail warehouses valued at BFr 2bn, and plans to float as a Sicafi investment fund within two years.
July 1998 Participates in buy-out of 370 properties from Swedish telecoms giant Telia, taking a 28% stake in the SKr 5bn deal. Partners are Deutsche Bank, SPP and Crown NorthCorp. Assets transferred to a new company, Telereit, which is aiming for a stock market flotation in two to three years’ time.
August 1998 Invests £4.5m in English & Overseas Properties’ budget hotels venture, Oriel Leisure. The company plans to open 20 to 30 Holiday Inn Express hotels in the UK.
August 1998 Teams up with US investors Apollo and Pelham Partners to take a 17.5% stake in serviced office operator Regus, for $100m. Regus plans to increase the number of centres it operates from 150 to 350 in the next two years.
