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In Walker's shadow

Why private equity real estate funds in the Uk would do well to note the Walker report and Duke Street Capital. By Robin Marriott

On Monday November 19, Sir David Walker published his final report, “Guidelines for Disclosure and Transparency in Private Equity.” Don't be fooled: though large parts of the report are irrelevant to private equity real estate funds, it is still applicable.

The report was commissioned by the British Private Equity and Venture Capital Association (BVCA) which caved in to pressure from trade unions and some politicians that have been calling for greater transparency in the industry. The pressure stemmed from a number of concerns linked to large-scale buyout activity, but boiled down to a fundamental premise: namely, if private equity employs hundreds of thousands of people by virtue of owning portfolio companies, then it has a duty to be transparent in its dealings.

Real estate investors should realize that the burden of Walker compliance is light and will only help the overall private equity real estate industry grow.

The widely trailed report really applies to large portfolio companies acquired by one or more private equity firms in a public to private transaction. And because of its definition of a “portfolio company,” the vast majority of private equity real estate investments should be unaffected. This is because a portfolio company is defined as being one where the market capitalization together with the acquisition premium is in excess of £300 million. In addition, more than 50 percent of revenues must be generated in the UK and full time equivalents employees total in excess of 1,000. The bar is raised to £500 million if the company is acquired as a secondary or other non market transaction.

The guidelines, though, relate to making public information about investments and are worth noting. They compel a firm to provide an annual report and accounts on the website of a portfolio company within six months of the year-end. It also compels the portfolio company to identity the private equity fund or funds that owns it, senior managers or advisers that oversee the funds, and composition of the board. In addition, the portfolio company must publish a business review outlining the main trends and factors likely to affect the future development, performance and position of the business and to include information about the company's environmental matters and social and community issues.

the portfolio company must publish a business review outlining the main trends and factors likely to affect the future development, performance and position of the business and to include information about the company's environmental matters and social and community issues.

However, as real estate funds search for greater value, investors are starting to buy operating companies for their underlying real estate with some frequency.

Though on the smaller side, the acquiring funds would still do well to embrace the spirit of the Walker report. This is because by seizing the initiative, real estate funds investing in operational businesses of any scale can help lead the industry into a more mature phase and perhaps head off the kind of close quarter inspection that mainstream private equity faced in 2007.

At the very least, real estate funds owning operating platforms should be making information publicly available about ownership, management and the investment plans for the business. Secrecy leads to unwanted scrutiny leads to regulatory action.

As such, many private equity firms are deciding to embrace the Walker report even if most investments are not applicable. Duke Street Capital has said it would embrace the report though less than a quarter of its portfolio companies come with Walker's remit. The sceptic might argue that Duke Street has been under the spotlight more than most, so it had to embrace it (one member of the Commons Select Committee expressed concerns over a factory closure in her constituency operated by a Duke Street portfolio company).

Real estate investors should realize that the burden of Walker compliance is light and will only help the overall private equity real estate industry grow.

Henderson raises €280m more for retail fund
Henderson Global Investors have announced the second closing of the Henderson European Retail Property Fund, having raised an additional €280 million ($412 million) on top of the €427 million raised at first close in December 2005. The second closing attracted 16 new institutional investors, bringing the total to 39. The fund targets retail warehouses and shopping centers in Eurozone countries with a particular focus on Spain, Italy, France and Germany. It is structured as a Fonds Commun de Placement vehicle (FCP) domiciled in Luxembourg. Neil Varnham, director of property, retail (Europe), said he was confident the fund could continue to outperform its 9 percent annual IRR hurdle.

Australian group ramps up European presence
European presence The Goodman Group, the largest industrial property group listed on the Australian Stock Exchange, has become an even bigger force in Europe with the bolt-on of a pan-European industrial fund. The Australian company has enlarged the Goodman European Logistics Fund (GELF) to €950 million ($1.4 billion) by merging it with the Celogix Property Fund. The merger adds a portfolio of 21 properties with a net asset value of €243 million at the end of September to Goodman's existing investments, increasing GELF's assets to 45 properties in nine European countries. Goodman entered the UK and Europe markets when it acquired Arlington Securities in 2005.

INREV: €12bn of equity for fund of funds vehicles
The European Association for Investors in Non-Listed Real Estate (INREV), has set up a database for the first time charting the growth, strategy and target regions in the expanding fund of fund sector. Details from 36 funds of funds suggest they have target equity of €12 billion ($17 billion). Twenty-two are closed ended and 14 open ended. INREV said there had been a steady rise in the number of vehicles being invested since first emerging in 2003. The average target internal rate of return is 12.1 percent. Data suggests €3 billion will target core vehicles, €5.3 billion value-added and €2.1 billion will look to invest in opportunity funds.

Correction: Palmer Capital Partners
In the November edition ofPrivate Equity Real Estate, we wrongly reported that HM the Queen had agreed to invest in Palmer Capital Partner's latest venture – a European version of its UK model. It is acknowledged that this is wholly inaccurate and that the Duchy of Lancaster on behalf of HM the Queen has made no such commitment. We sincerely apologise for this mistake and are pleased to have the opportunity to publish this correction.