EUROPE NEWS: Pruning Grove

Towards the end of last month, Grove International Partners assembled team members in New York for its annual global offsite gathering. This year, however, the occasion took on extra significance compared to previous occasions because changes are afoot at the private equity firm.

Senior partners at Grove have jointly devised a new strategy for the firm to focus investment activity on the US, which means that its global headcount will be redeployed.  This has implications for the 50 or so professionals that work in the company’s offices in New York, London, Frankfurt, Amsterdam, Tokyo and Singapore.

Since spinning out from Soros Private Fund Management in 2004, Grove has been a private company that has not readily sought out the limelight, and that hasn’t changed much in recent year. In light of the strategic shift, however, Markus Hens, head of Grove’s office in Frankfurt, agreed to discuss the firm’s future.

Hens declined to be specific in terms of people, including rumours of key men leaving, but he said:  “We have galvanised our team in the US and have moved resources to the country. The investment strategy drives a lot of this change, which is typical for a boutique, globally active private equity investment fund.”

Hens continued: “For the last two years, the company has been focusing on North America because we believe it has increased in attractiveness dramatically. Grove always has focused on the mantra that you have to go where the opportunity is. So, the US has been the centre of our activity, and we have sourced an interesting pipeline of opportunities with first-rate entrepreneurs. We have a business in California with Ned Fox called VPI, where we have made two large acquisitions involving office repositions. We also have established a business in New York with William Macklowe called WMC.”

The shift in sentiment towards the US became somewhat apparent about two years ago, when co-founder Richard Georgi moved from Japan to the US and co-founder Richard Mully remained in Europe. Behind the current decision to shrink in Europe is a general stance that, relative to the US, the market is not a great place to invest right now. Similarly, Japan is being de-emphasised given that the opportunities there currently are not very attractive either.

In Europe, Germany has been Grove’s largest investment market by far in recent years. The firm, which specialises in making platform investments in real estate-rich companies, has holdings representing investments of more than $500 million in equity in platforms such as Aurelis, a real estate company focused on development, and active asset management of a large portfolio acquired in 2007 from German railway company Deutsche Bahn.

“We believe that, out of all the places in Europe, Germany probably is the best place where one can still make investments, although the risk-return profile in the last couple of months has shifted materially,” Hens said. “Therefore, we are very cautious and selective because the debt markets are beginning to dry up, making it rather tough to do good deals.”

Grove will continue to focus its European efforts on Germany.  Indeed, it recently established a new platform looking at hotel businesses with Anders Braks, who runs Event Holding in Cologne.  The venture inked its first transaction in August, investing in the Renaissance Hotel in Munich. “We hope to scale that business going forward,” Hens added.

In terms of the fundraising environment, Hens said the market is tough for medium and smaller players. “We will need to face that challenge and raise capital in 2012 or 2013,” he added. “We haven’t yet decided upon a starting date, but I wouldn’t be surprised if we were in the market within 12 to 24 months.”