The Five Food Groups – November 2008

RETAIL
Heading for the sales
Mervyns may have pointed the finger of bankruptcy blame at its private equity-backers but the California discount chain hasn’t been able to overcome the reality of 2008: that retail is seriously suffering in the US. After three months in bankruptcy protection, the retailer said last month it would now liquidate its remaining 149 locations and auction off its store leases as it seeks to hold “going out of business sales”. Mervyns was taken-private in a $1.2 billion deal by Lubert-Adler Real Estate, Sun Capital Partners and Cerberbus Capital Management in 2004. However in September, the firm filed a lawsuit against it owners claiming it had been the victim of a “fraudulent transfer” whereby the company’s real estate assets were “stripped” from the operating business in order to leverage the buyout. The deal, Mervyns said, eventually forced the retail business into bankruptcy. Retail – and private equity-backed retail – has taken a hit over the past few months as the credit crunch has impacted on Main Street. Apollo Global Management’s portfolio company, Linens ‘n Things, also failed to come out of bankruptcy protection last month, despite once being the US’ second largest housing retailer. Apollo bought a $201 million stake in Linens in 2006 but a turnaround plan for the company failed to overcome the downturn in the US economy. In Europe, retail is also in the limelight – this time, however, as a possible investment opportunity. Debt belonging to the Icelandic investor Baugur – which owns famed UK retail stores such as Hamleys, House of Fraser and Debenhams – is reportedly being eyed by private equity firms TPG, Alchemy Partners and Permira. Anyone buying the $1 billion of debt, which is owed to the now-nationalised Icelandic banks of Kaupthing, Landsbanki and Glitnir, would get effective control of the company, according to its executive chairman Jón Á sgeir Jóhannesson.

INDUSTRIAL
Asian storage
Rapidly growing domestic consumption in Asian’s emerging markets has attracted a host of private equity real estate firms to invest in a variety of real estate sectors. Pro- Logis, however, is betting that the industrial sector will be one beneficiary of this expansion – namely the distribution warehouses that deliver fashion to the Asian high street. The Denver-based industrial property investment firm last month paid $44.2 million for a 392,000-square-foot distribution warehouse in South Korea’s Gyoenggi Province, an area which comprises 70 percent of the country’s logistics market. The three-story property, bought through the firm’s $500 million South Korea- focused fund, the ProLogis Korea Fund, which closed last year, is already fully leased to a clothing designer and retailer that distributes brands such as Converse and Kappa throughout Korea.

OFFICE
From Colgate to Carlyle
Real estate investors may be watching the UK office market with caution, but Washington DC-based private equity firm The Carlyle Group is bullish on the sector – having invested in its second redevelopment project in Manchester. Carlyle has partnered with Abstract Nikal to acquire an 8.4 acre site that was formerly the home of toothpaste manufacturer, Colgate. The property, which will be redeveloped into offices and hotel space, is located in the newly- named “Media City” area of Salford Quays, named as such for the relocation of five BBC departments over the next three years. Carlyle recently closed on the office building Piccadilly Place III, in Manchester’s city center, and has started redeveloping the adjacent Piccadilly Place IV. The deals were all made through Carlyle Europe Real Estate Partners III.

HOSPITALITY
Budgeting for China
The emerging markets are not all about building luxury real estate. Actis and Warburg Pincus are betting that the budget hotel industry can continue to eat into the market share of higher-priced rivals. The private equity firms have invested $65 million in the 7 Days Inn Group, one of the fastest-growing players in China’s budget hotel industry. The investment will drive the expansion of 7 Days Inn’s national network in China, which has been the largest growing budget hotel for the past three consecutive years, according to a 2008 survey by the Ministry of Commerce and the Hotel Association of China. Lim Meng Ann, head of Actis for China, said the deal was about targeting domestic consumption “particularly those which are defensive in times like this”.

RESIDENTIAL
Henderson eyes follow-on fund
As the residential market takes a battering in the US, private equity real estate firms are continuing to eye the multifamily space as an attractive hedge. Londonbased Henderson Global Investors is one such firm, with plans to launch its follow- on multifamily fund, CASA V, early next year. The property investment manager last month purchased a 280-unit apartment block in San Francisco as part of their current fund, the $205 million CASA IV. The Montego Ridge Apartments, in Antioch, California, will be upgraded. Henderson said it would continue to invest in the sector in the US over the next six months. To date CASA IV has bought eight properties in Minneapolis, Kansas City, Chicago, Los Angeles, Baltimore and New York. CASA V is expected to be launched early next year.