EUROZONE: Welcome to CEE distress

Central and Eastern Europe (CEE), Lehman Brothers and an ice hockey-loving entrepreneur. It may not sound like a winning combination for a successful debut fund, but last month Revetas Capital Advisors – founded by Eric Assimakopoulos, who used to own HC Slovan in Slovakia, and backed by the former head of Lehman in Europe and Asia – raised about €100 million towards a €300 million target for a recovery fund focused on the region.

Part of that initial success can be attributed to Assimakopoulos, who has an interesting past and present. Since setting up his latest investment firm in 2009, he has been working out of the offices of Keith Breslauer’s Patron Capital when visiting London. That is because he is a good friend of Breslauer, who sits on the Revetas advisory board and with whom he invested in a hotel in Slovakia nearly a decade ago.

Assimakopoulos and Breslauer also share an interest in extreme sports, and it was adrenaline-rush pursuits that turned out to be a factor in the evolution of Revetas. That is because, according to rumor, Assimakopoulos was skiing somewhere in Europe when he met Jeremy Isaacs.

Isaacs is a name that might seem familiar because he held very senior positions at Lehman Brothers, where incidentally Breslauer also worked. Isaacs, who was appointed Lehman’s chief executive officer for Europe and the Middle East in 1999 and additionally was named chief executive of the Asia-Pacific region in 2000, is credited with building up the investment bank’s international operations. He left the bank days before it crashed, moving on to found JRJ Group as a private firm that focuses on making investments in financial services companies.

It turns out that JRJ ended up backing Revetas and, from now on, Assimakopoulos will share an office with JRJ’s staff in London. Not only has JRJ invested equity with Revetas, but it also is supplying the firm with back office administration, fundraising capability and a network of investors globally.

Assimakopoulos has become a familiar figure in places such as Slovakia, partly because of his government links but mainly via a financial stake he owned in HC Slovan. Indeed, he was instrumental in bringing recent Stanley Cup champ Tampa Bay Lightning to town to play the local team, as well as attracting the ice hockey world championship to Slovakia.

Assimakopoulos was brought up in New York and wanted to be an ice hockey player himself when he was younger. Instead, he found himself going into business and forming Metronexus, a technology-driven real estate fund that partnered with Morgan Stanley Real Estate Investing. Together, they went on to acquire and develop $300 million-plus of property in the US and Europe.

After making a fortune from selling that business, Assimakopoulos later formed another firm, Bilfrost Investment, to invest in various European businesses. However, since the global financial crisis of 2008, he has concentrated on real estate in the CEE region with his firm Revetas. That firm is now gaining attention as it ploughs a lone furrow in a large overlooked field.

No one can really raise private equity real estate funds for the CEE region because investors want to put their money into safer, larger and more liquid markets. Still, Revetas seems to be enjoying some kind of minor miracle whose earthy explanation likely can be found in an interesting market perspective.
The CEE market is quite unique in that the banks control most of the assets in one way or another, and many people have waited for a recovery in the region for the past two or three years. Revetas, however, has an alternative view: there is NO recovery for the 2006 and 2007 investments made by other parties.

What is left with banks right now is a large pool of cash-flowing properties that happen to be overleveraged, owners that are out of the equity and banks that are extending and pretending. In the meantime, the value of the property is suffering from poor management. Revetas is offering fresh equity so the original sponsor can leave with a little bit of money – they will take a loss of course, but at least the former owner will have salvaged some pride – the banks get a new partner with capital to invest in the asset and the tenants have an incentive to stay.

CEE assets are not distressed per se, but some of them are on the brink of becoming so because of a lack of capital, skill and motivation. One of the lessons that investors are going to have to learn from the past is that they cannot take a Western-style approach to the region by investing money in a property and using a local real estate broker to run it. The barrier to entry therefore remains a local presence.

Given that so many investors got burned in the CEE region the first time around and that they now want to be in funds exposed to deeper, more predictable markets that are recovering, you would think a €300 million fundraise would be a difficult, uphill struggle. It probably will be, and one must wait to see if the ultimate equity goal can be reached. However, with its first few investments made, Revetas at least stands a chance of succeeding whereas just a couple of years ago it would have stood none.