A growing group of investors is talking excitedly about taking advantage of distressed opportunities. The term covers a wide range of situations, from buying loans from banks to taking over ailing fund management businesses.
But what happens when investors get involved in a distressed situation? To find out, EuroProperty talked to two fund managers abouthow they took over the troubled business of other fund managers.
Henderson Global Investors is busy with the takeover of fund manager New Star after its share price collapsed. New Star has three property funds aimed at retail investors: the UK Property Unit Trust, the Global Fund and the International Fund, which has beenclosed for redemptions since last November as a result of investors pulling their money out of the funden masse. Henderson is looking at selling some of the fund’s assets to ensure liquidity.
Henderson was attracted toNew Star because it thought New Starwould give the fund manager a retail distribution platform. “Whatever you think of New Star, they sold incredibly well,” says Mike Sales, head of property investment at Henderson.
Henderson moves up the rankings
The takeover will propel Henderson, traditionally an institutional investor, to the number five position in the UK retail investment market. New Star is expected to contribute to earnings from next year onwards. The immediate concern for Sales and his team has been to keep the retail investors onboard.
“Obviously, the retail customer has been hurt as commercial property has suffered,” explains Sales. “Our immediate plans are not about expanding the fund but reassuring investors. Our message is that the time to come out has passed. It is not a question of you ‘may as well hang in‘. Investors are getting income return after cost and fees of 6.5%. That’s not a bad income in the current environment. The average lease length is 12 years.”
The other challenge Henderson is facing is integrating the New Star staff. The sales managers were as important to New Star’s success as the fund managers. Sales says that the New Star people, the majority of whomwill move to Henderson’s buildings, havebeen cooperative and helpful. He downplays cultural differences between the more entrepreneurial New Star and the institutional Henderson.
Cultural similarities
“We’re pretty culturally alike,” says Sales. “First and foremost is to look after the investor and to bewhiter than white. New Star does not have research, transaction andbusiness development departments. New Starcomes in with itsfunds and now it’sgot somebody who wraps his arms around it and looks at the assets and what returns they will give.”
For Palmer Capital Partners, taking on staff was not an issue when it agreed to take over the management of two Belgravia funds. The two funds – the Belgravia European Property fund and the European logistics fund –were in the hands of the administrator, Deloitte. The logistics fund is a €20m joint venture with Belgian developer IIG, which is now bankrupt.
The Jersey financial regulator was looking into the fund and the island’s police havelaunched a criminal investigation. The takeover was delayed becausethe net asset valuation in the Belgravia European Property Fund was obscured bya web of companies.“There is a Jersey structure, then a Luxembourg one and then the local property holding. We know what the properties are worth and what the debt is, but there arevarious assets and liabilities in the corporate structures,” says Guy Barker, managing director, Europe.
Protecting the previous manager
After the Belgravia investors chose Palmer to run the two Belgravia funds – a thirdUK fund was too far underwater to be saved – one of the first things the fund managerdid was to get investors to agree that they would not sue Palmer over mistakes by the previous fund manager. It then needed to get a grip on the assets. The two funds owned 16 assets in 10 countries between them. “Each country had its own holding structure, tax advice, etc. There is even a country with one asset of €1.5m,” says Barker. “It is inefficient because of that spread. Theoretically, it was diversified but in practice it was a negative diversification.”
Also,Palmer had to talk to the banks to make sure that theywere not going to foreclose on the assets, all of which had a high and some even a negative LTV, before it had a chance to put things right. “We needed to create cashflow on the property to see if the income was going to service debt,” says Barker. “There was a lot of datain different places and itwas not always correct. We had to use our own skills to evaluate the data.Then we had to create a financial model for the whole fund.”
Palmer plans to improve the net asset value by giving up assets with a negative NAV. This is possible because the assets are not cross-collateralised.
