Patron Capital closes seventh opportunistic fund in ‘brutal’ market

Founder Keith Breslauer says most US investors were not interested in pursuing distress in Europe, perceiving a greater opportunity at home.

Patron Capital has closed the seventh vehicle in its flagship value-add and opportunistic fund series with around €660 million in commitments, as well as an additional €200 million of discretionary co-investment capital.

The London-based manager had set a target of €1.2 billion for Patron Capital VII including co-investment, according to a previous PERE report from September, and was aiming for a final close in Q1 of this year. According to US Securities and Exchange Commission filings at the time, investors had pledged total commitments of around €888 million across the fund and its co-investment side vehicle. Since then, PERE understands that a number of investors chose to reallocate their Fund VII commitments from the main fund to the co-investment vehicle. At €860 million, the lower capital total at final close is a result of currency movements and co-investors’ discretion.

The fund’s predecessor, Patron Capital VI, closed with €716 million in December 2020, raising an additional €128 million for a co-investment vehicle.

According to Keith Breslauer, founder and managing director of Patron, the experience of being on the road with Fund VII was “pretty brutal” given the lack of available capital among many investor sources.

In this instance, around 76 percent of capital raised for the fund came from Patron’s existing investor base and existing relationships, with the majority of commitments coming from the US and Canada, followed by Asia-Pacific, Europe and the Middle East. Investors included pension funds, sovereign wealth funds, endowments, foundations and family offices.

Breslauer: investors are doing more due diligence than normal

Breslauer told PERE he observed minimal appetite from US investors for European real estate while fundraising. “Very little new capital came in from the US except for re-ups,” he said. “We found much more appetite in non-US jurisdictions such as Asia and the Middle East.”

One known US investor that did allocate to the fund was the Arizona Public Safety Personnel Retirement System, according to PERE data, which committed $100 million in August 2022.

The fund held a first close in March 2023 with €659 million, according to PERE data. Around halfway through fundraising, Breslauer said, investors began to perceive that interest rates had stabilized and could start coming down soon, which catalyzed additional interest in the fund. However, extending the fundraising period to accommodate more closings was not an option, he added, as investors in the fund were keen to start deploying capital to take advantage of opportunities.

“I would say the amount of due diligence that investors are doing is more than normal levels,” he explained, adding that many US investors in particular were not able to take on new managers in Europe.

“The biggest challenge today is that the US is perceived as a greater opportunity than Europe because there’s more distress. I’m not sure that it is a greater opportunity, but that’s definitely the perception.”

He argued the ESG dynamic in Europe, where there is greater risk of buildings becoming obsolete for sustainability reasons, makes the opportunity to capitalize on distress more interesting than in the US. “When you combine the capital needed for refurbishing with maturing debt, you’ve got a big problem.”

Such deals are a key focus for the fund’s investments, he added, which will extend across a range of property sectors and across Western Europe. The UK and Germany are the focal markets, Breslauer said, owing to the higher use of leverage relative to other markets in Europe, meaning banks in those countries are under greater pressure.

Fewer deals closing

So far, Patron has invested 10 percent of the fund’s capital. The firm’s typical deal size ranges from €30 million to €80 million in equity, with co-investment capital used to execute larger deals. The fund targets gross returns of 17-20 percent and gross equity multiples on invested capital of 1.6x-2.0x over a four-to-five-year investment horizon.

Acquisitions made thus far include the Livingston Designer Outlet in West Lothian, Scotland for £57 million ($71 million; €66 million), according to Colliers, as well as a distressed hotel in Portugal, residential assets in Spain and industrial assets in both Germany and the Netherlands.

Breslauer said that while plenty of distressed opportunities are filling the pipeline, the number of deals actually closing is “about half of what we used to do.” He said pricing issues were to blame for this, and described the Bank of England’s decision to hold the interest rate at 5.25 percent last week as “a very confusing message.”

He explained: “On the one hand rates were held firm, but on the other hand, the Bank of England gave a very clear signal that rates are probably going to go down faster and greater over time. And that said to a borrower, well, let’s hold on, because who knows, maybe everything will get a bit better.”