It is undeniable that there has been consolidation in the private equity real estate industry, but one wonders if the universe of those making opportunistic real estate investments isn’t actually expanding in Europe. Witness the way some alternatives groups have been growing their teams and even hiring from private equity real estate firms in a move that inevitably leads to a richer league of competitors.
Several examples cropped up recently, some of which have gone unnoticed while others have been more public. The one that perhaps has gone most unnoticed so far is Castlelake, a global firm headquartered in Minneapolis and established in 2005. The firm, which is made up of senior people from Cargill and changed its name from TPG Credit, describes itself on its website as being focused on “deep value, asset-rich opportunities in dislocated industries, employing a differentiated investment approach in capital starved situations.”
In Europe, Castlelake has been busy buying up nonperforming loans under the leadership of London-based Europe head Jonathan Fragodt. But low and behold, the firm recently made an additional hire to bolster the ranks in the shape of someone with a private equity real estate background. Maqbool Mohamed, who has enjoyed stints at Citi Property Investors and Grove International Partners as well as Cargill, became European finance director in September.
Interestingly, Castlelake is an alternatives firm that also is involved in global aviation and shipping. As such, it is not the only alternatives platform that recently has recruited to bolster its European opportunistic dealmaking capability. Added to that list can be Newport Beach, California-based Pacific Investment Management Company (PIMCO). A few months ago, the firm recruited Laurent Luccioni, who left as head of MGPA in the wake of its merger with BlackRock, another large asset manager.
PIMCO’s opportunistic real estate group, led by two former JER Partners professionals, is operating out of the firm’s alternatives division and, like Castlelake, has been buying real estate before making its additional hire. Last year, it struck two notable deals in Germany. In August, it bought a Lehman Brothers real estate debt portfolio with a face value of €238 million from Germany’s Bundesbank. According to reports at the time, Germany’s central bank ended up controlling the debt after Lehman used it as collateral for rescue debt finance in 2008.
When ones adds these names to mainstream private equity firms, one can see how an exciting new competitive landscape is opening up in Europe. H.I.G. Capital, another US firm, hired Chris Zlatarev to become head of European nonperforming loans at subsidiary Bayside Capital earlier this year. Not only did he work at Varde Partners Europe, but at AIG Global Real Estate as well. By the way, Bayside is the firm that struck the first portfolio deal this summer with Spain’s Sociedad de Gestión de Activos procedentes de la Reestructuración Bancaria.
Further examples include Fortress Investment Group discreetly going about its business under the direction of former Deutsche Bank professional Cyril Courbage. Apparently, it has deals in Spain and even Greece – to name two dislocated markets it is interested in.
TPG Capital, which last month took down another major corporate deal by taking over PointPark Properties, clearly is making waves along with Kohlberg Kravis Roberts and now Angelo Gordon & Co. That latter firm, which says it is committed to alternative investing, just launched its first dedicated European opportunistic real estate fund. The AG Europe Realty Fund, its first real estate fund outside of the US market, is seeking a reported $300 million to $500 million of commitments, as PERE reported last month.
Each firm no doubt will suggest they have unique positions or an expert team to capitalize on opportunities unfolding in Europe – and to a large extent they do. Without question, though, it makes watching the market more fun as they rub shoulders with pure private equity real estate firms operating on the European circuit.
Still, one wonders how it is that firms big in alternatives are stepping up. They must have support from underlying investors otherwise there wouldn’t be a business to grow. I won’t give too much away, but the head of alternatives at a major group that is active in European opportunistic real estate talked about performance and how mistakes hadn’t been made in 2005 and 2006 when others were raising funds. On the other hand, it feels like this firm has been operating in real estate mortgages for decades, so this latest push in real estate and into Europe is an extension of the trust it has earned from investors.
When it comes to alternatives, investors have a very strong desire to diversify their exposure from stocks and bonds and they are looking, of course, for people that have built a track record of alpha rather than beta performance. Put together that appetite for yield and diversity with trust in a manager, and you have a powerful proposition.