Friday Letter Handle with care

Blackstone’s barracking over its investment into Southern Cross demonstrates that firms will have to be careful in their future real estate dealings. 

The Blackstone Group woke up last week to a front page splash in the Financial Times about the plight of British care home operator Southern Cross.

In case you hadn’t heard, Blackstone has been accused of ruining Southern Cross via sale and leasebacks leading to crippling rents. The fact that the accusation is baseless only hurts more. Blackstone actually sold the company five years ago and the sale and leasebacks were done before its ownership. Oh, and the global financial crisis didn’t help either.

Still, the furore serves as a timely reminder that private equity and its brethren in the private equity real estate sector are never far from the firing line of those seeking targets to blame for wider problems.

Paul Kenny, general secretary of the UK labour union GMB, said in relation to Southern Cross: “These kings of private equity meet in secret. More is known about the Mafia than about the antics of private equity. What further ravages are they planning for the British economy and British jobs?”

Well, that question deserves an answer. Or more specifically, deserves some careful thinking about by those engaged in private equity real estate. It might be care home sale and leasebacks that today receive such scrutiny, but what about tomorrow? Perhaps distressed real estate loans acquired from bailed-out banks, large upmarket residential developments, or perhaps property acquired from a cash-strapped government?

Arguably, big firms like Blackstone or Lone Star can look after themselves. Witness Blackstone’s explanation of its involvement in Southern Cross, for instance.

But what about those middle tier and smaller private equity real estate players that have the skill and appetite to buy big, but may not be as geared up to deal with the fall-out from an investment that flares up politically?

Mainstream private equity firms in the UK have the British Private Equity and Venture Capital Association (BVCA) to stick up for them. On the Continent, there is the EVCA, but there is no equivalent really for private equity’s cousins in private equity real estate. Instead there appears to be a gap.

INREV, the European Association for Investors in Non-Listed Real Estate Vehicles, is perhaps the closest organisation that could defend the sector. It has recently appointed, for the first time ever, a director of public affairs and is opening an office in Brussels, so that is something. But it only has a few opportunity real estate fund members. It is mainly for institutional investors.

Indeed, even in the US there is a hole with no single organization seemingly out there to defend the industry if needs be. Beyond general umbrella real estate organsiations that private equity real estate firms might be members of, there seems little else. It seems our sector is falling between the cracks.

How to avoid or respond to headlines in a British newspaper like the Daily Mail that scream “X made $1bn from RBS” is something that firms of all sizes need to think about. Moreover, there is work to be done for private equity real estate as a group on how to get its messaging right and whether it needs some help from a devoted sector association.