The UK private equity real estate industry might be in need of an image makeover if it wants to gain access to all the potential deal flow out there.
This is because among certain financial organisations that could provide opportunities, there seems to be a reluctance to deal with the sector.
Lloyds Banking Group, headquartered in London, is an example.
The recently nationalised bank needs to work out its estimated £70 billion property portfolio. However, according to PERE sources, it is currently holding internal discussions about the public reaction it might experience if it were judged to have ‘given away value’ to a private equity firm. In other words, it doesn’t want to transfer assets to a barbarian that might make money out of it. “Fat cat private equity firm buys Lloyds loans on the cheap” would be the nightmare headline both Lloyds and the British government are keen to avoid.
To be clear, there is no formal policy in place at Lloyds that says it cannot have a private equity firm as counterparty to a property deal. But according to those with direct knowledge of the bank’s property team, Lloyds has a “high reluctance” to deal with private equity. It is far more likely to transfer assets to more “acceptable” counterparties such as a British REIT.
The implication is clear: Private equity will not be first in the queue. Last month, UK daily the Daily Telegraph reported how Lloyds had established a number of preferred partners to advise it on managing down its portfolio. Among those reportedly in the frame are Land Securities and British Land – two REITs. Then there is Grosvenor, the British property company owned by the Duke of Westminster, and an Australian fund manager (Footnote: a firm emanating from part of the British Commonwealth).
Lloyds, by the way, is not the only British bank which needs to unwind significant real estate holdings on the balance sheet – and thus a potential source of deal flow. There is also the Royal Bank of Scotland, which like Lloyds has the government as its largest shareholder. RBS is at least as likely as Lloyds to view private equity as inappropriate boyfriend material.
The negativity towards the industry raises the question whether private equity real estate in the UK is in need of a brand makeover or at least a big lobbying effort. This would be aimed at persuading nationalised institutions that private equity firms, rather than being viewed as pariahs, should be seen as legitimate providers of capital and appropriate counterparties in any property transaction, including ones that involve tax payers’ money.
Private equity real estate in the UK has been conspicuous by its absence from lobbying not just on the issue of being acceptable partners to nationalised institutions. It has also largely failed to address the pressing matter of Europe’s draft directive on Alternative Investment Fund Managers (AIFM), which has potentially huge implications for private equity real estate funds.
Lobbying, of course, is not the sole answer to all the ill winds that are blowing the way of private equity real estate in the UK at the moment. But one wonders if leaving itself open to the criticism that it did little to promote itself when it had the chance to do so is the wisest course of action for the industry.