Graphite targets bricks and mortar

Graphite Capital, a mid-market UK-based private equity firm, has made its first foray into real estate with a £100 million (€120 million; $146 million) investment in a start-up housing developer called London Square.

Graphite believes the UK housing market is at a cyclical low and due to benefit from favourable long-term drivers. The firm cited land prices that have been falling since their 2007 high and constrained supply of residential property in London.

London residential property: 'Under-supplied'

“The London house-building market has unique features, such as a high proportion of public sector ownership and involvement, which means there are fewer competitors than outside London,” the firm said in a statement.

The deal is unusual for Graphite, not only because it represents the firm’s first foray into the property sector, but also because the £100 million funding package – comprising £50 million of equity and an expected £50 million of senior bank debt – will be used as start-up capital for entrepreneur developer Adam Lawrence to build the business from scratch.

Lawrence has spent the last 12 years at Barratt Developments, a London-listed house builder, where he started and ran the West London division. More recently he served as chairman for Barratt’s London and Thames Gateway division.

The London Square investment is analogous to Graphite’s successful start-up of Avery Healthcare, said Graphite senior partner Mike Innes in an interview. Avery, which developed care homes from scratch, was created by a team of entrepreneurs with Graphite’s backing and was ultimately exited in 2007 via a £96.5 million trade sale. Graphite has subsequently backed the same management team to repeat the strategy.

“Like our care homes investments we see an opportunity to build a mid-market vehicle that will be attractive to larger players in due course,” said Innes. “House building is certainly novel to a degree for us, but it is consistent with a lot of the things we have done. Private equity firms have invested successfully in the sector before.”

London Square will focus on prime sites within the M25 motorway and aims to build 600 homes a year ranging in price from £200,000 to £1.5 million. “There remains a strong pipeline of new opportunities, including distressed land sales from financial and government institutions,” said Lawrence in a statement.

London Square is the fifth investment made by Graphite Capital Partners VII, a £585 million fund raised in 2007. The fund still has so far deployed less than half of its capital.