EUROPE NEWS: The Italian job

Goldman Sachs snuck back into European distressed investing last month. The firm’s Real Estate Principal Investment Area (REPIA) acquired almost 900 non-performing and sub-performing loans secured by an Italian residential property.

Though relatively small (the gross book value of the loans is €120 million), the Italian deal is large in significance.

It is approximately four years since Goldman last made an investment in Italy after being priced out of the market. More importantly, though, the Italian deal is a “prototype” for the kind of transactions to come around the world, said global head of REPIA Edward Siskind. “It is this type of activity that we think is the future of our business model for the next few years,” he said.

In order to buy the loans, Goldman moved fast to make an unconditional offer to the receiver of an insolvent financial institution.

It relied on the Archon Group – its captive real estate management firm – to assess the loans. Having received an assurance from the financial institution that it would sell at a market clearing price, REPIA moved in and bought them. It knows that through Archon in Italy – which employs 140 people – it will now be able to work through the loans in the slow-motion Italian legal system.

REPIA intends to work more closely with Archon around the world using its 1,500 staff to source deals or manage out assets.

“The period we are going into plays exactly to our strengths,” Siskind said. “We have a team that worked though the last financial crisis and in the Archon franchise we have 1,500 people and probably the largest global footprint of any distressed loan workout group.”

He added: “We are part of the Goldman Sachs franchise, and what we found in the last crisis was our relationships and our access to financial institutions that hold these distressed assets were extraordinary. In many cases we didn’t just buy assets but joint ventured with [these financial institutions].”

As part of its positioning, Goldman has downsized REPIA, and restructured the senior management. It has also consolidated all of the real estate investment businesses into the merchant banking division under the REPIA umbrella. It is also redeploying experienced professionals to the major markets.

Richard Powers, for example, is moving back to New York from London to co-run the US business with Alan Kava. Similarly, Jean de Pourtales is relocating to London from Singapore to lead investing in Europe with James Garman.

De Pourtales has been running the firm’s Developing Markets Real Estate Fund, a $2.1 billion vehicle, since 2007. However, he is better known for involvement in Goldman Sachs investments in France where the firm was the largest acquirer of distressed investments in the 1990s. According to the firm, Goldman has $6 billion of equity to deploy globally in real estate.

The equity for the Italian deal came from Whitehall Street International Real Estate 2008, which has $2.3 billion of commitments. The other buckets of equity available to the firm include a US core fund, a US mezzanine fund and the developing markets fund.
The bucket though could be bigger still thanks to the firm’s special situations group, which in Japan has been merged under the REPIA umbrella.

The days of easy finance are over and the wave of opportunities are not here yet, so Goldman is not expecting an avalanche any time soon of the billion dollar deals it is famed for. That said, only last year it got finance for and wrote a €1 billion equity cheque to buy German residential property company, LEG.  That deal was the last of a generation of large, residential portfolio sales in Germany.

REPIA seems able to invest again despite still having to deal with legacy issues in previous Whitehall funds and having shrunk the platform.  

 “We expect the market to be dominated by distressed opportunities and we will be working very closely with Archon to pursue them,” said Siskind.