Private equity firms are becoming white knights for certain unlisted property funds that are in danger of breaching banking covenants.
In one of the first transactions of its type in the UK, New York-based AREA Property Partners has agreed to acquire £50 million (€56 million; $73 million) of newly-subscribed units in the Junction Unit Trust.
The problems at the Junction fund have been well publicised, yet they are not unique. Junction has come under pressure from lenders to improve its financial position by lowering its debt load.
By attracting investment from AREA, the fund has managed to adjust the terms of its financing arrangements. This includes increasing its loan-to-value covenant to 90 percent until the end of September, and extending the loan facility to April 2014 (or any earlier date should the fund be wound up).
The deal, which is due to close this month, means AREA is investing in a section of the UK retail property market which many firms believe is close to bottoming out.
B&Q: big tenant
Experts point to a number of experienced investors who have been buying big box retail units in out-of-town locations in recent weeks. The sector appears to have weathered the storm better than that of High Street retailing, which has seen far more companies going bankrupt compared to those trading on parks. Tenants at Junction properties include one of the UK's leading home improvement stores, B&Q.
If there are any losers in this deal, it is existing unit holders. Some have agreed to subscribe to new units themselves. However, the units are being priced at around 18 pence – a 40 percent discount to the unit price in March, according to Capital & Regional, which co-manages the fund alongside Aviva Investors.
The discount implies that current unit holders are experiencing a significant dilution of their interest in the fund. Capital & Regional currently holds a stake of around 28 percent.
It's not the first time that AREA has invested in assets managed by Capital & Regional. Last year, AREA bought a 50 percent stake in Capital & Regional's business in Germany to help it improve its financial position further.
AREA has been one of the higher profile movers among private equity firms in Europe. Earlier this year, it acquired properties once owned by the collapsed property empire of UK private bank and investor, Dawnay Day. It made the acquisition in the €897 million portfolio in a joint venture with F&C REIT Asset Management. AREA has been investing out of its Apollo European Real Estate Fund III, which raised $1.38 billion in 2008.