BLUEPRINT: Independence Day

Roger Barris, American-born but a long-time fixture of European private equity real estate, is enjoying some new found freedom these days. Following almost 25 years of working for large financial organisations (see The life and times of Roger Barris, opposite page), he and his partners have finally established their own independent company.

Peakside Capital was formed in September 2010 through a buyout of Bank of America Merrill Lynch’s European private equity real estate platform by its management team, which consists of Barris, Boris Schran, Stefan Aumann and Mark Fenchelle.

In his first interview since the spinout, Barris explains how his target is to create an independent mid-sized asset manager of European funds with a focus on Germany and countries east of Germany. He also wants to grow a separate account and niche business in established markets and is looking seriously at “busted general partners,” which he feels might not be able to raise capital and would have a “better future” with Peakside. But perhaps the most important task for Barris and his team will be an initial fundraising effort, which could commence before the end of the year, he reveals.

PERE caught up with Barris in February during one of his regular visits to London. Although the new group is headquartered in tax-friendly Zug, Switzerland, where senior management is located, Barris frequently jets into London, where the firm employs 10 professionals who support the senior team. Numbers in both locations probably will grow over time, and staff in London will soon decamp from serviced offices in Berkeley Square to a permanent base in Knightsbridge, opposite the famous Harrods’ department store. 

Quick witted, humourous and a frequent visitor to airport lounges (he juggles his time between Switzerland, the UK and France, where his family lives), Barris is a product of Wall Street, but perhaps with the added touch of occasional self-depreciation that doesn’t always come naturally to many products of New York’s mega-banks.

When asked, for example, if he always intended to be in real estate he says “no” and goes on to jest: “Real estate doesn’t exactly have the best reputation, so I tell my mother I make my money dealing drugs to save the embarrassment.” It is a good line, but there is a serious point to it, as many investment banks jumped into US subprime lending from 2005 onwards – a move that later came back to bite them.

The genesis of Peakside

Barris’ time at Merrill Lynch began in 2005, when the bank was looking to strengthen its real estate principal investments business. He was hired by former Blackstone Real Estate Advisors co-founder Tom Saylak as head of Europe, Middle East and Africa (EMEA) principal investing. The idea was to begin fundraising quickly, and the first private equity real estate fund that Merrill Lynch ever raised in the region was under the team that Barris ran.

Real estate doesn’t exactly have the best reputation, so I tell my mother I make my money dealing drugs to save the embarrassment.

Roger Barris

It was the beginning of 2007 when Merrill Lynch launched the Bosphorus Real Estate Fund I. Although Merrill wasn’t too keen on selling a Turkish property vehicle, Barris recalls how institutional investors heard about the fund by word of mouth and actually contacted the unit in order to invest. It eventually raised €204 million in equity.  
A few weeks after closing Bosphorus, Barris’ group started raising a European vehicle, the Merrill Lynch European Real Estate Opportunity Fund. Clearly, the era of what Barris calls the “easy days of fundraising” – when the large investment banks were able to corral billions of dollars – was over at that point. The European fund raised just €260 million of its €500 million target.

Shortly thereafter, in early 2008, Merrill Lynch started to feel the pinch as a result of its subprime exposure and securitised mortgage investments. As losses mounted and liquidity came into question, Bank of America stepped in and swallowed the firm for $50 billion.

Around this time and in common with other large captive real estate groups at investment banks, the fear was that staff would leave as Bank of America had concluded that the unit was not a core business activity. The solution to preserving capital was to keep the team together and so, by the middle of 2009, the bank agreed to the buyout of the funds, along with an agreement to manage legacy EMEA real estate investments on Bank of America’s balance sheet.

What happened with the European private equity real estate business is quite different from how events panned out for Bank of America Merrill Lynch’s corresponding Asia platform. In that instance, the bank decided to sell it to The Blackstone Group instead of spinning it off to management. In contrast, as part of the European buyout, Peakside acquired Bank of America Merrill Lynch’s general partner interests in the Europe and Turkey funds, although the bank remains an LP.

In acquiring the bank’s GP interests, the only complicated thing was securing LP consent, which was the job of Barris and the rest of the management team. The Turkey fund has around 15 LPs, the majority of which are high-net-worth individuals from the Middle East, plus a couple of institutional investors. The Europe fund has more investors – about 25 – and a greater mixture of high-net-worth individuals and institutional investors, predominantly European. “It went extremely well,” he says.

With the buyout completed, the Merrill Lynch European Real Estate Opportunity Fund has been renamed Peakside Real Estate Fund (PREF) I.

Improving results

Barris says the European private equity real estate funds are performing well, although the Turkey fund is not faring as well as the Europe one.

“We were extremely cautious during the bubble days,” Barris says. “We explicitly said during the fundraising: no UK, no France, no Spain and no Ireland. It is in the PPM because we felt these markets were clearly overheated.” Instead, the Europe fund focused on assets in Germany and Central Eastern Europe, where it “found some value,” he notes.

The Europe fund ended up making almost all of its current nine investments in Germany, with residential property being the single largest sector, chosen for its defensive characteristics. The fund tended to buy smaller off-market, high-quality portfolios in economically vibrant areas of Germany rather than the large pan-German portfolios that were auctioned off, which Barris says often were an invitation to overpay.

An example of a representative deal was the €100 million acquisition of residential units in Bavaria and Berlin. This investment currently has one or two problem projects, but no “huge black spots,” Barris says. The fund has managed to increase rents, he adds, which has been made possible because residential construction in Germany has fallen dramatically, with about half the typical annual volume of 300,000 units being completed. Another hallmark of the approach was that the Europe fund typically did not take on short-term debt. Often, it agreed to five-year terms with no bridge funding. Consequently, the earliest maturities come up in 2013.

From the time of Lehman Brothers’ collapse until the middle of last year, the team improved on this situation under marching orders to buy back every piece of debt, at a discount, that it could. Barris says the economics of these buybacks were very attractive and had the added benefits of de-leveraging transactions in a difficult operating environment and extending maturities even further. The key was having money left to invest, without which the fund would have not been able to take advantage of these buying opportunities. “One of the mistakes a lot of our competitors made was they spent every last penny,” he observes.

Turkish displeasure

Barris next details the Turkey fund, which has not gone as well as the European effort. That fund made four investments in Turkish retail and two in Turkish residential properties. One retail investment – a shopping centre – soured badly.

The problem, says Barris, is that retail in Turkey got hit very hard during the financial crisis. “The Turkish consumer is extraordinarily sensitive, perhaps because of the country’s history of financial crises,” he explains. “When sentiment deteriorates, things shut down completely.”

One of the mistakes a lot of our competitors made was they spent every last penny

Roger Barris

The problem is that Turkish retailers have struggled to pay rents. This is because rents are often paid in euros or dollars, while the Turkish lira that the humble shopper pays the retailer has become devalued. Turkish retailers are not very well capitalised, so the combination of less revenue and more rent expense has led to many threatening to quit shopping centres, Barris explains. The hand of the retailer has been further strengthened due to an oversupply of centres and deficiencies of the Turkish legal system.

Of Peakside’s other retail investments in Turkey, Barris says the only other operating one is “doing okay” because the fund bought it at an attractive price. The other two retail investments were acquired as sites at attractive prices, and the fund intends to sell them as they are. 

Meanwhile, performance for the Bosphorus fund’s two residential deals has been mixed. One site has been “shut down” and the fund is now looking to recover the limited capital it invested, while the other has been doing quite well, Barris says. In all, the fund expects the losses on the retail side to be partially compensated for by gains on the residential side.

Marching orders

For Peakside, the job at hand is to manage out the Turkish assets as well as the team can. The Turkey fund’s investment period has closed, and LPs were relieved of most of their obligation to meet further capital calls.
The other task is to invest the remaining equity in the Europe fund while liquidating existing assets. Starting in mid-2010, the fund started a new push to invest its remaining €70 million to €80 million of uncalled capital.
Barris notes that the UK and France have become “incredibly competitive” again and jokes that there was a two-week window at the start of 2009 “when London was cheap”. The same goes for France, he says, where the fund recently lost out on the bidding for a 1960s tower in Paris’ La Defense business district that will be completely vacant in two years’ time.

Instead of ultra competitive markets, Peakside will continue to be focused on Germany, where the firm feels it has the strongest team of anyone, as well as Central and Eastern Europe and Turkey because of Peakside’s existing relationships, experience and the underlying growth potential of those region.

“It is still possible to buy good quality assets at good prices in those markets, as there is nowhere near as much competition as in Western Europe,” Barris says. “Poland, the Czech Republic, Slovakia and Hungary all have economies very closely tied to Germany. Germany is Hungary’s and the Czech Republic’s number one trading partner.”

And, in a somewhat counter-intuitive play, Ireland also is an investment destination Peakside is considering. Barris describes the market as an area “so out of fashion” that it is finding relatively little competition.

Given current austerity measures in the wake of last year’s €85 billion bailout, Ireland retail and residential property might not be the way to burn through the fund’s equity, Barris concedes. But Irish offices, driven by Ireland’s renewed competitiveness as a place for foreign inward investment and its export-driven nature, may be a sector to go for, he adds.

We need to demonstrate to people that we invested successfully during a very tough time and still generated a reasonably positive return for investors even in a vintage year when everyone else was incurring huge losses

Roger Barris

“I am a believer that the Irish economy is taking the tough decisions needed for the new world,” Barris says. “For example, a recent study estimates that a new entrant to the Irish market could be paying 25 percent to 33 percent less in terms of rents, salaries and everything else compared to the peak of the market.”

Furthermore, Barris believes that the first assets Ireland’s bad bank, NAMA, will exit will be those in far-flung markets, such as parts of Eastern Europe. “That is another reason why one of our focuses is Central and Eastern Europe,” he says.

Barris’ points show how he is a macro-thinker, a way of investing that is complemented by the strong “bricks and mortar” focus of Peakside’s other senior managers (see It takes a team, opposite page). “Real estate investing has to be both macro and micro,” he says. “You have to have a view on the overall economic picture because real estate is an incredibly cyclical business. At the same time, you need to make sure that the ‘bricks and mortar’ work and that you have the management skills needed to execute your plan. This is where Boris, Stefan and I work together very well.”

Back to the fundraising trail

Should Peakside manage to invest the remainder of its Europe fund before the investment period expires in January 2012 as well as successfully exit its existing assets, the firm could be on the fundraising trail by the end of this year, Barris says. So far, it has sold one investment fully at a significant profit and has liquidated large amounts of the assets in other investments in line with or even above business plans, he notes. However, it currently has had no other full exits.

Although Peakside also is pursuing separate accounts in more established markets as well as busted GPs, its first fundraising will be the litmus test of the independent firm. Mercifully, the fundraising market is improving, Barris notes. “There is not very much for opportunistic investing yet, but that will start opening up,” he adds.

In the meantime, Peakside will carry on with asset management and building up the requisite track record, which will be a key selling point. “We need to demonstrate to people that we invested successfully during a very tough time and still generated a reasonably positive return for investors even in a vintage year when everyone else was incurring huge losses,” Barris says.

Peakside hopes to deliver returns in the “double digits,” which Barris thinks should put the fund in the upper quartile of performance, or maybe even higher. If that is the case, the firm should be able to attract the equity commitments required to ensure that Barris enjoys his new-found independence.

The life and times of Roger Barris  

Peakside’s chairman and founding partner jokes about the number of jobs he has had in his career. “I have changed jobs quite a bit, so at this point I have pretty much worked with everybody,” Barris says. Peakside Capital’s chairman and founding partner has worked for Goldman Sachs, Deutsche Bank, Starwood Capital Group, Merrill Lynch and Bank of America Merrill Lynch, so he is only half-joking when he adds: “Many people might have ‘six degrees of separation’ [the idea that we are all, on average, approximately six links away from any other person on earth], but I am closer to just one degree with everyone in the industry.”

Barris studied at Bowdoin College in Maine and the University of Michigan’s Ross School of Business before joining Goldman Sachs in 1987 in the bank’s mortgage securities business. It was in 1990 that he left his job in collateralised mortgage obligations at Goldman and went to live in France with his French wife, who he had met in New York. While in France, he taught finance and edited computer manuals.

Barris rejoined Goldman Sachs in London a short while later – “after the money ran out” – and resumed work in the mortgage securities business, eventually becoming head of the mortgage desk for Goldman Sachs in Europe. Starting in 1995, his work became much more focused on principal investing with regard to nonperforming loans and straight real estate deals, sometimes alongside the Whitehall Street Real Estate funds led in Europe by Richard Georgi.

Over time, the principal investing activities of the mortgage desk evolved into the global special situations group, consisting of many people that have since formed Mount Kellett Capital Management, the New York private equity firm co-founded by Mark McGoldrick. Another former partner in the special situations group, Peter Briger, is now a principal at Fortress Investment Group.

As part of the special situations group, Barris recalls he reported directly to Steven Mnuchin, who went on to set up alternatives and real estate firm Dune Capital Management with former Whitehall head Dan Neidich.

In 1997, Barris left Goldman Sachs to join Deutsche Bank in London, where he set up a European principal investing business. Roughly 80 percent of the deals the business invested in were in real estate, including a French residential developer and the Hilton Hotel in Prague. The bank also entered into the largest Swedish real estate deal at the time – the acquisition of five Swedish real estate companies from the national telecom company, Telia, in partnership with Bankers Trust and others.

One of the attractions of the buyout is that we were able to bring over the entire team, a team that we had been forming over the last few years and which is very strong

Roger Barris

When Deutsche Bank bought Bankers Trust in 1998, Barris merged his principal investing business into that of Bankers Trust and took responsibility for Europe as European head of the combined firm’s real estate opportunities group. Reporting to David Brush, his group went on to invest in nursing homes in France, the Hotel Arts in Barcelona, a large residential portfolio from EDF and a property deal with Italian utility giant ENEL, among other things.

Next in Barris’ career came a short stint with Starwood Capital Group in 2004 as partner in charge of Europe. It did not last long, Barris says, but it provided useful experience with deals such as the recapitalisation of Le Meridien and the commencement of the Société du Louvre transaction.  In 2005, he became managing director and European head of Merrill Lynch’s global principal investment group, from which Peakside Capital was spun out in September 2010.

It takes a team

The upside of the buyout is that Peakside starts with an experienced group of professionals
Although it may seem like Barris is taking on the market himself, Peakside Capital’s gregarious leader isn’t doing it alone. “One of the attractions of the buyout is that we were able to bring over the entire team, a team that we had been forming over the last few years and which is very strong,” he says.

Barris’ two senior partners are Stefan Aumann and Boris Schran, both German and the core of Peakside’s team in that country. Barris calls the pair “the best in the business by far.” 

Aumann is a Goldman Sachs alumnus who joined Merrill Lynch before Barris’ arrival, originally to lead the origination and execution effort in Germany.  Having originated most of the deals in the Merrill Lynch European Real Estate Opportunity Fund, he now focuses on asset management, although he still plays a big role in acquisitions and sits on the investment committee for the firm’s funds. “Our philosophy is you eat what you kill, so we like to keep the originators involved in the asset management of the deals,” Barris says.

The other senior partner, Boris Schran, joined Merrill in early 2007 from Morgan Stanley, where he headed up German asset management and acquisitions. “Boris has a great reputation and standing in the market,” Barris says. “We were very fortunate to be able to hire him at the time.”

Filling out the senior team are: Mark Fenchelle, an Englishman and another longstanding colleague from Merrill Lynch, as chief financial officer; Christophe Munte, a German alumnus of Freshfields Bruckhaus Deringer and Morgan Stanley, as general counsel; and Zeynep Fetvaci as head of investor relations and new business development.

Peakside Capital


Zug (Switzerland), London, Luxembourg
and the Cayman Islands


Key personnel:

Roger Barris, chairman and founding partner
Stefan Aumann, head of asset management
and founding partner
Mark Fenchelle, chief financial officer
and founding partner
Boris Schran, head of acquisitions
and founding partner
Christophe Munte, general counsel
Zeynep Fetvaci, head of investor relations

Funds under management:
Peakside Real Estate Fund I (€261 million)
Bosphorus Real Estate Fund I (€204 million)