It wouldn't be a normal week in Europe if a private equity real estate firm didn't agree the purchase of some unwanted real estate assets from a bank or state-run asset management group.
True to form, on Tuesday this week the latest press release arrived. This time, the subject line was: “Patron Capital acquires €228m loan portfolio from NAMA”, which is Ireland's National Asset Management Agency.
There is no denying the effect of these deal declarations: they superficially contribute to the overall message about who is 'winning' in Europe. The problem is that it’s still too early in the deal life cycle of these transactions to make this call with any real conviction. Sure, the deals show that here are experienced buyers that can perform. But in terms of earning returns for LPs and carry for themselves, only time will tell.
So let’s forget the buyers for a second. If you are looking for certainty right now in terms of who financially is gaining out of the €1 trillion-plus balance sheet-shrinking process under way in Europe look no further than the lead sell-side advisors on these transactions.
Given the volume of sales occurring, one might have thought there would be a gigantic group of advisors getting a piece of the pie. In fact, the opposite is true. It is the big four accountancy firms that have the market sewn up. Deloitte is said to be the most active lead advisor in Europe on debt sales – not just real estate, but consumer debt. Then there is KPMG, which has scored incredible success advising Ireland's IBRC which has unwound €20 billion of loans in just 12 months. EY, meanwhile, has just advised NAMA on the Patron deal and has been busy along with PwC. Apart from these, there are really three others often cited by pere firms as being active though to a lesser extent – Lazard, UBS and Eastdil Secured.
Though this band of advisors taking the lead advisory role to deleveraging banks is tiny, the scale of the opportunity for earning fees is not. By the time 2014 is out, around €50 billion of unwanted real estate will have been sold in Europe, according to Cushman & Wakefield. If you assume all seven firms mentioned above were equal, that €50 billion equates to €7.1 billion of sales volume each upon which they charge success fees. Only, the advisory mandates are not evenly spread because Deloitte, KPMG, PwC and EY are the busy ‘sell-side’ advisors, so the figure could be closer to €12.5 billion each.
These advisors suggest that there remains at least another five years of de-leveraging at more or less the same pace, so one could estimate fees will be earned on a total sales volume of €250 billion up to 2019. Some people even say it might take 10 years to complete the unwinding, so it could be success fees on €500 billion.
This begs the question, why are there so few firms involved on the advisory sell-side? One answer is that the fees, while they clearly mount up, aren't jet-propelled enough for the investment banks, so they are not playing much in this arena. Another explanation for their absence is the investment banks were buyers of loans once but aren’t anymore. As such, they no longer have sizeable teams with relevant experience. Meanwhile, the property agents are not exactly geared up for the task either. Yes, they have the property know-how, but can they compete with the accountancy firms when it comes to understanding the complexities of loans, a bank's P&L account and all the regulations driving decisions?
If one examines the likes of Deloitte, the people that work for this de-facto oligopoly have been doing this through all the cycles. They advised on loan sales when Sweden blew up in the early 1990s, then during the Savings & Loans crisis in the US. Later in 1997, there was the Asia financial crisis, and Germany’s financial implosion post-integration – these teams were heavily involved in many of these. Naturally, now they are reaping the rewards post-GFC. Only this time around, the deal flow is much greater than during any of the prior cycles.