EUROPE NEWS: Hybrid theory

Co-investment capital is not a new thing in private equity real estate, but some general managers in Europe are building it into their new funds in a more ‘defined way’ to cope with the modern-day demands of investors. Witness Moorfield Group and Catalyst Capital.

Charles Ferguson Davie, chief investment officer at Moorfield, explained to PERE that its latest vehicle, Moorfield Real Estate Fund III, is not all that dissimilar to its previous funds. However, when it comes to co-investment, that element of the offering is being presented in a more ‘structured’ way.

“There are a group of investors from around the world who still want to invest in discretionary funds like ours and are happy with that structure and the way it works, although that universe has shrunk a bit,” said Ferguson Davie. “The reason we have created this co-investment in a more structured way is because some investors just want a little more flexibility or ‘optionality’. They don’t like the sense that a commitment is a ‘liability’ and, if the world falls of a cliff again, they are stuck with those commitments. Some want a bit more flexibility to see what happens in Europe and the UK and would like the ability to switch on or switch off.”

Last month, Moorfield announced it had raised more than £100 million (€117.5 million; $153 million) at first close from existing investors in the US and Europe. The fund is offering a three-year investment period and an eight-year life, during which time the London-based firm hopes to invest its capital and generate IRRs between 15 percent and 20 percent and a 2x equity multiple.

Another group that has made co-investment capital a more defined part of its fundraising plans is Catalyst Capital, also based in London. As PERE revealed last month, the pan-European firm’s second fund, Catalyst European Property Fund (CEPF) II, is seeking €450 million of its €600 million equity target as co-investment capital.

Julian Newiss, founder of Catalyst, told PERE that CEPF II is an “innovative co-investment vehicle.” Indeed, each investor’s financial allocation would be split into two elements: a smaller commitment, over which Catalyst would have discretion, and a larger amount for co-investment, over which each investor would retain the investment decision.

Much already has been made of firms allowing co-investment capital a greater role, with some maintaining this has to do with bowing to pressure from limited partners to decrease the overall fee burden. However, Ferguson Davie dismissed this as a driving reason in the case of his firm. He argued it was more about needing to be able to say to a potential seller that the firm had sufficient resources to complete a transaction.

“If we see opportunities that merit additional capital beyond what the fund can do, we will go to the investors and see if they would like to invest in a particular opportunity,” Ferguson Davie said. The difference is “they will have told us in advance how much co-invest capital they have, not necesarily put aside but potentially allocated to us.”

In addition to the fund (over which Moorfield has discretion) and co-investment capital (over which it does not), the firm anticipates joint venture capital to play a part in the overall effort, as it has done in prior funds. “We just have to offer the investors more optionality and flexibility,” said Ferguson Davie. “This is evolution rather than revolution.”