For Isabelle Scemama, AXA IM Alts is just getting started in private equity investing.
In November, the subsidiary of the French insurer closed on the acquisition of Kadans Science Park, a developer, owner and operator of science parks and lab offices from Oaktree Capital Management – its fourth private equity transaction in as many years. AXA IM Alts made its first investment in a real estate operator in 2017, with the acquisition of Retirement Villages Group, a UK-based retirement village developer and manager, followed by the purchase of European data center operator Data4 in 2018 and acquisition of French student housing and co-living operator Group Kley in 2019. The investment manager has now amassed a portfolio of approximately €5 billion in private equity-style investments including operating platforms.
“It’s a big area of growth,” Scemama, global head of AXA IM Alts, said in an interview with PERE. “Now we are quite used to doing private equity deals, buying the operating platform and being identified in the market as a credible partner for this kind of strategy.”
Private equity investments represent one of three investment strategies in real estate for the real assets team at AXA IM Alts, which currently manages €70 billion in direct real estate. The business is best-known for its core, open-ended funds, which represent approximately €50 billion of its real estate holdings, and its development strategy, which accounts for about €10 billion. However, “operating platforms will represent more and more” of AXA IM Alts’ portfolio going forward, she said. The business has not set specific growth targets for private equity and instead will be opportunity-driven in its expansion.
At the same time, the investor’s approach to investing in operators differs from traditional private equity firms with its long-term holding period, she pointed out: “If you really want to extract the value of a platform, you have to look long term, to be able to do development, to be able to progressively enlarge those platforms, diversifying them geographically. It’s impossible to generate the full value-add attached to those strategy in three or four years’ time. It’s probably more like a decade.”
In fact, the holding period for an operating platform investment, “can be perpetual,” Scemama noted. “We have a lot of expectations on these platforms, so we don’t plan to sell them. We plan to grow them and develop the business and where appropriate, bring in other investors alongside us, but with no deadline in mind.”
AXA IM Alts’ competition for private equity deals includes a mix of private equity firms, institutional investors and other asset managers. “It is a competitive market. But what I think makes the difference is execution capability, especially in a covid environment where people worry a lot about accessibility to leverage,” she remarked. “We can underwrite without leverage.”
Notably, “a lot of private equity firms don’t have the capacity to do development themselves,” she added. After all, development is a multi-year process that requires finding land, negotiating building permits and delivering and operating the building. Additionally, “development is risky for people who don’t know how to do development.” AXA IM Alts, however, has been doing development for more than 20 years.
AXA IM Alts typically targets double-digit returns for its operating platform investments, albeit not in the high double-digits since it typically uses leverage below 50 percent. “It always depends on the quantum of development we do into those platforms,” she explained. “The more we do development, the higher we expect the return to be.”
Scemama considered AXA IM Alts’ private equity investments to be a bet on long-term cash flow growth and capital appreciation, given that the operators in its property portfolio represent sub-sectors that are expected to expand for the foreseeable future.
“For me, the biggest opportunity is in growing the existing platforms we have,” she said. “Depending on the opportunity we identify, we may decide also to incubate new strategies and development platforms by ourselves. So it can be a mix of growing existing ones, incubating a new strategy or buying. If we find a new Kadans next year in another asset class, we will consider it.”