EUROPE NEWS: Success in distress

Saul Goldstein seemingly launched his private equity real estate firm in the most inauspicious of times, yet Activum SG Capital Management has just successfully closed its second real estate investment fund on €238 million – more than twice its original target.

Goldstein’s success was by no means assured when he left private New York investment firm Cerberus Capital Management in May 2007. Indeed, within a year and a half, Lehman Brothers went bust. “Perfect timing,” he said, with ironic humour. “We launched our first fund in 2008 and made our very first capital call on our very first investment at the end of 2008.”

Nevertheless, the first deal and the subsequent five that were made over the course of 2009 and 2010 are performing well, and those investments overall are projected to return 28.3 percent before fees and the promote. “It just seemed to be sensible to go back to the roots of opportunistic investing, which is hunting unstable buildings that needed to be turned around,” said Goldstein.

Still, leaving Cerberus was a career gamble. Having begun as an analyst at Cargill Financial Services, Goldstein had joined the investment firm in 1998 and went on to work in New York and Tokyo, where he bought distressed debt pools in Asia, mainly in Japan but also in Korea and Thailand. He then ran Cerberus’ German and European real estate investment advisory activities, first in Frankfurt for three years and then in London.

Activum’s first fund was modest, with €56 million in commitments focused on distressed real estate and special situations in Germany. Using very little leverage, the fund targeted mixed-use commercial, retail and residential buildings in Frankfurt, Berlin, Hannover, Cologne and Munich, dragging them up to a core level. In doing so, Goldstein has caught the attention of more established principals, with one recently identifying him as a rising star.
Looking back at the first fundraise, Goldstein noted that the timing didn’t exactly look good. “The climate was difficult for raising money, and I had never really been on that side of the business,” he said. “But as it turned out, we found some LPs that really liked what we set out to do.” Some of those first investments will be realised this winter, a litmus test for that projection of 28.3 percent IRR.

According to Goldstein, investors in the first fund asked if Activum would raise a second one, and so it did, holding a first close at the end of 2010. At that point, it hired global placement agent Atlantic-Pacific Capital to broaden the scope of limited partners. The firm started holding investor meetings in January, and the fund was fully subscribed by June. It closed last month with more than 20 investors from the US and Europe, ranging from institutional investors, endowments and foundations to family offices and fund of funds.

“Fund I was a great laboratory to make sure everything was working well,” said Goldstein. “Part of the reason we had such strong demand is that we are a niche player and we did exactly was we said we would do in Fund I. When we started, my basic view was that, if we could produce these assets at a yield several hundred basis points wider than that of the fundamental core market, we would be able to exit.”

Activum’s new fund targets small- to mid-market assets costing between €10 million and €75 million, with equity commitment sizes of €10 million to €40 million. The firm recently closed on financing for an asset, albeit with conservative leverage, giving a glimpse into the kind of financing available for opportunistic deals in Germany.
“It is a blessing and a curse,” Goldstein said. “The blessing is that we financed at 140 basis points over the five-year swap rate, which was 1.91 percent – resulting in less than 3.5 percent financing for five years for that asset. But that also is a curse because you don’t know how long such financing is going to last. It is going to lead people to be exuberant about cap rates that they are willing to pay to the extent that they are yield investors.”

Continuing the thought, Goldstein added: “Many international property buyers were forced to withdraw during the financial crisis as leverage levels and aggressive underwriting became unsustainable.”

Goldstein noted that there are equally good strategies to Activum’s in Germany, such as being a huge fund of the kind that Lone Star operates. “The view of those kinds of funds is that they are not going to just buy a nonperforming loan pool, they are going to buy the bank,” he said. “That works, but you have to move billions in capital. So, I think you need to be either really big or small, niche and focused.”