Hands down, not out

Why Terra Firma’s failure to IPO its German residential platform is not the end for the firm’s founder.

Terra Firma has suffered the ignominy of pulling out of a real estate IPO in Germany. But this is not the abject horror some have made it out to be.

Certainly, Tuesday’s late decision to scrap the floatation of Deutsche Annington Immobilien the evening before it was due to start trading on the Frankfurt Stock Exchange hasn’t enhanced the firm’s reputation. After all, nobody likes to have to ask share buyers if they would like to accept a smaller float amid one or two significant orders falling away at the last moment.

However, some reports suggesting this is a failed comeback for Terra Firma’s founder Guy Hands after the company’s disastrous investment in music company EMI might be stretching things a little too far.

For one thing, there is far more pressure on the London-based firm to make successful exits out of three other more traditional private equity investments than Deutsche Annington.

The latter is the one and only investment in a special €2.1 billion fund called Terra Firma Deutsche Annington (TFDA) separately marketed to investors interested in German residential real estate. It is 82.5 percent owned by investors in the fund and 17.5 percent owned by Citigroup. But the crucial fact is it was created in 2006 and doesn’t expire until 2019. One should believe that the firm has more time on its side to realize a successful exit.

Altogether more pressing are the three assets held by Terra Firma’s generalist European private equity fund TFCP II, which concludes in 2015 and was marketed to a different investor base. These are Odeon & UCI cinemas, renewable energy generator Infinis, and Phoenix Group, a gas supplier business in Northern Ireland. Terra Firma has far less time to play with these investments, all of which were made between 2003 and 2005. According to the Financial Times in May, the firm hired advisors to prepare a sale or IPO of Odeon. The other two are expected to be out on the block sometime in the next 12 months. If the firm fails to exit those three it will certainly make life much tougher to market its next fund.

And being able to do just that is of course the ultimate test. TFDA aside, Hands hasn’t raised a raised a fund since May 2007.

But back to this week’s aborted IPO. The other reason why nobody should get too het up about it is it wasn’t exactly the firm or its founder’s fault.

Two weeks ago, bankers working on the float admitted it was going to be a struggle to get to the top of the price range, but they were confident they could sell shares at the medium or lower price mooted. Unfortunately though, Ben Bernanke frightened global capital markets on Wednesday June 19 when he appeared to say the US Fed would cut back its bond buying program which has helped keep interest rates low so far. And so investors started getting nervous.

At the same time, investors monitored the performance of Deutsche Annington’s nearest comparable company, LEG Immobilien, which Goldman Sachs’ Whitehall funds and hedge fund Perry Capital took public in February this year. It started off at €44 a share giving the company a market cap of €2.3 billion, but has dipped since then to €39 a share now – an 11 percent markdown.

Amid the nervousness. the Deutsche Annington deal collapsed on Tuesday. Can it come back? We think so. No-one has said to PERE that Deutsche Annington is the best company in the world, but neither is it the worst. It owns 190,000 residential units and has spent about €100 million to improve operational efficiency and customer services. Terra Firma is valuing its €2 billion equity investment at 2x cost at the moment.

Listing the business at a decent price now would have been the kind of positive marker Hands has been chasing for some time. That it didn’t happen has created yet another test of the Englishman’s resilience. He is certain to fight on. Anyone itching to write him off should keep their eyes on Odeon, Infinis, and Phoenix Group instead. Let’s talk again once the fate of these investments has been decided.