EUROPE NEWS: Zloty ambition

Throughout the 1990s, Przemyslaw Krych and his two longstanding partners spent much of their time privatizing Polish companies such as a cement manufacturer and a high street department store. Now, the team behind Warsaw-based private equity firm Cornerstone Partners is busy looking to take advantage of distressed real estate and special situations in the Central and Eastern Europe (CEE) region.

In an effort to further that business, last month Oaktree Capital Management became a 50 percent partner in Cornerstone’s joint venture property investment arm, Griffin Group. Oaktree, via funds advised by its European principal group, purchased its stake from Chelsfield Partners, a firm started by British property tycoon Elliott Bernerd and backed by the Qatar Investment Authority. The new backing by Oaktree will provide Griffin with additional equity to make fresh acquisitions in Poland.

Speaking with PERE, Krych noted that he and the co-founders of Cornerstone, Tomasz Klukowski and Marcin Halicki, actually made their names in Poland and other parts of Central and Eastern Europe at Bank Handlowy, which was established in 1993 and where Krych formed a private equity business. In 1999, they left the bank to run Franklin Templeton’s emerging Europe private equity funds division. Throughout their time together, the trio pulled off a string of eye-catching deals including the privatization of Poland’s largest cement company, Cementownia, and the country’s largest chain of high street department stores, Domy Towarowe Centrum.

Following a wave of deals, Krych and his partners decided to start Cornerstone in 2001 with financial backing from Dave Williams, the former head of Alliance Capital, the US asset manager that later became AllianceBernstein. As an independent company, the trio continued investing in buyouts such as Lux Med, one of the largest healthcare providers in Poland that subsequently has been sold to Bupa. Further deals took place in the hydro and wind power sectors.

Krych noted that Cornerstone already had completed real estate deals, just not in an organized fashion, when the firm founded Griffin in 2006. Immediate prior to forming Griffin, the partners had bought state-owned cinema operator Neptun Film. In communist Poland, cinemas were positioned next to churches to offer an alternative place to go on Sundays. Krych and his partners shut down the operation and started converting the 44 theatres to retail properties. Halfway through the program, it exited the investment successfully to London’s Patron Capital.

That original Neptun Film investment was made in partnership with Chelsfield, and Cornerstone decided to continue investing through the partnership. The joint venture formed private equity real estate funds, the first of which was Griffin High Street, a fund that raised €50 million in 2007 mainly from high-net-worth individuals in the Gulf region. The same year, the venture created Griffin Property Finance, a mezzanine property fund that raised €150 million and whose main investor is the Abu Dhabi Investment Company.

Cornerstone already had come to know Oaktree in 2006, when the Los Angeles-based firm was one of the parties originally considering the 50 percent stake in Griffin, Krych explained. Instead, their relationship began in 2010, when Cornerstone and Oaktree started a joint fund called Griffin Topcore I – and subsequently Griffin Topcore II – to enter into distressed real estate deals, restructurings and special situations. The only investors in those two vehicles were Cornerstone and Oaktree. However, with the recent deal for Oaktree to own 50 percent of Griffin, the two firms have since launched Griffin Topcore III, which will open up to third-party investors.

Of the corporate transaction, Krych said: “We have been working with Oaktree for three years as they are basically a limited partner in funds we manage. This transaction is the next step in cementing that relationship.”

Oaktree’s intention behind the Griffin investment is to create a long-term platform to make real estate-related investments in Poland, including direct purchases of assets, development projects and lending activities. “We have been following the Polish real estate market for many years and had been looking for potential partners who could provide us with the right platform to make significant investments over a long period of time,” said Karim Khairallah, managing director of Oaktree’s European principal group and head of its’ CEE activities, in a statement.

For its part, Oaktree is no stranger to Poland. Indeed, it is known in the country as the owner of spirits company Stock Poland, formerly Polmos Lublin, and Zielona Budka, one of the best-known ice cream brands.

So far, Oaktree has allocated €150 million to the partnership with Griffin. A portion of those funds, in conjunction with other capital, has been used to purchase such assets as the Renoma Shopping Center, office buildings in Warsaw and a land bank for residential development.

“Contrary to popular belief, there is still a lot of capital looking for investments but definitely not enough management talent providing for its effective deployment,” Krych said. “Oaktree does that on a global scale, while Griffin is focused on regional markets. An exchange of experience benefits both sides of the equation.”