There is a perception that this is as good a time as any to be an advisory firm selling non-core real estate loan portfolios in Europe on behalf of governments and banks. With tens of billions of euros-worth of such assets sold so far, and much more in the works, this assumption is broadly correct.
The surprising thing, however, is that there are very few advisory firms selling portfolios on behalf of clients with any degree of frequency. There exist a few good theories as to why this is, ranging from unattractive fees for bulge-bracket investment banks to the complex nature of such sales. Whatever the reason, there are two names that stand out in this specialized field: Deloitte and KPMG.
It turns out there is insufficient data to confidentially back up claims by one firm or another about being a market leader in sell-side advisory work. That is because no single firm is keeping a full, 100 percent accurate and comprehensive log of all the transactions to have occurred since the global financial crisis. One good reason for that is some transactions have remained confidential.
Out of the few players, though, Deloitte is the firm most often cited as being the busiest in Europe, and certainly in the UK and Ireland. By its reckoning, it has executed somewhere in excess of 100 distressed real estate and corporate debt transactions in Europe over the last four years. It also says it has acted in just over half of the 60 or so transactions in Europe over the past year.
Whatever the extent of its success in the arena, times certainly seem good for Deloitte as a whole. In 2013, it earned a record $32.4 billion in revenues from its entire audit and consulting business – that is up a massive 40 percent on its revenues in 2007, just prior to the crisis.
Deloitte, headquartered in New York, is one of the Big Four accountancy firms and employs 203,000 people around the world. Its roots, though, are not American but English. The name derives from William Welch Deloitte, a descendent of an aristocrat that fled the French Revolution. In 1845, he became the first independent auditor of the Great Western Railway, and the business grew from there.
Aussie influence
Despite Deloitte’s English and US pedigree, it turns out that the person most private equity real estate firms would be interested in is neither American nor English. David Edmonds – the partner in charge of portfolio lead advisory services, which assists holders of debt in selling, buying and managing their portfolios – is actually an Australian based in London.
Edmonds joined Deloitte in November 2010 from BAWAG PSK Capital Advisors, a European portfolio company belonging to New York-based private equity firm Cerberus Capital Management. (Incidentally, Cerberus has been a regular purchaser of portfolios from Britain’s Lloyds Banking Group, which in turn has often been advised by none other than Deloitte.) Prior to BAWAG, Edmonds spent 20 years at PwC doing pretty much the same thing as he now does at his current employer.
Given Deloitte has sold so many portfolios in Europe this past four years, Edmonds is in the privileged position of having a ringside seat at the great de-leveraging process under way in Europe. He splits his time between talking to banks, governments and financial institutions about their plans for noncore assets and in leading actual sales that might result.
To any group relatively new to buying debt portfolios in Europe, it may seem like Edmonds and Deloitte suddenly have popped up on the radar. However, he says: “This is basically all I have done and all my team has done for the last 20 years.”
Edmonds’ point is that, at any given time, there is always a financial crisis going on somewhere in the world. In the early 1990s, Sweden “blew up” and there was the US savings & loans crisis that spilled over to the early 1990s. Later, in 1997, there was the Asia financial crisis and Germany’s financial implosion post-integration and, of course, the crisis from which today’s deals emanate – the big crisis in 2008 that has earned its own acronym, the GFC.
The difference between the GFC compared to previous crises is volume. “The volumes now are so huge, and we act as lead sales advisor on so many of these transactions – and probably more than we ever have done through some of those other cycles – that the appearance of our role, I guess, has slightly changed,” says Edmonds.
Trying to put things in perspective, Edmonds was involved in 30 or 40 sell-side transactions over a five-year period during the Asia financial crisis. In Europe currently, he and his team have acted on 30 in just the last year alone, he says.
Indeed, Edmonds estimates his team has advised, designed and structured between €300 billion and €350 billion of banks loan and asset sales. The amount he was acting on during the Asia financial crisis would have been “a fraction of that.”
Taking care of business
Edmonds thinks of his job as having three phases. Phase one is trying to help out a bank in deciding what makes sense to package up and bring to market. That is an equation driven around where pricing is and what makes sense from a profit-and-loss perspective, as well as which loans should go together in a portfolio to attract buyers.
Phase two is a period of “heavy lifting,” where the team compiles data and information required for a decent sales package.
Phase three is the business end, where Deloitte engages with buyers and banks. On this latter stage, the process involves many phone calls to potential buyers to sound out their appetite and interest. It is done almost on a “no names” basis, where Deloitte explains the portfolio without even mentioning who the seller is.
The formal process includes signing non-disclosure agreements and a process letter explaining the start date, the period open for initial review and due diligence leading to a date for an indicative offer. Deloitte will then chose one, two, three or maybe four buyers to go through to the final binding phase. As the final bid day draws closer, the informal communication process amps up, during which even more information is provided to buyers, such as some perhaps previously overlooked facet of an individual asset.
In the endgame, one or two of the bidders will meet face-to-face with Deloitte. If it is down to two parties, they obviously are kept in separate rooms to negotiate on price and sales documents. In the end, one will get selected as the buyer.
Edmonds stresses that Deloitte is “very upfront” with buyers about pricing expectations. “If we think someone is getting it wrong, we will try to provide some guidance,” he says. “I don’t think we would horse trade between buyers. Once you have got formal bids, if two buyers are relatively close, we will get them in a separate room and walk through the pricing with them. We would say that, on a particular asset that you have put at €x million, we think you are ‘light’. We might ask them to look again at that particular asset.”
Edmonds adds: “This isn’t about trying to negotiate a price. It is genuinely about if we think they have something left and pointing them towards certain parts of the portfolio in an open way.”
One investment professional from a private equity firm operating in Europe said of Deloitte: “They have their processes down to a fine art.” However, he did venture that the loans they have sold on behalf of Lloyds Banking Group were “straightforward – bilateral, usually single jurisdiction and usually the same buyer (Cerberus).”
Handicapping the field
Cerberus is clearly just one of dozens of firms that are active in European real estate debt presently. Like measuring the busiest advisory firms, no one can precisely measure the total size of the field there is for all types of European debt. Indeed, Edmonds says his own estimate probably will be off by about 20 or 30, but he reckons there are probably 100-plus private equity funds looking for distressed debt opportunities in Europe.
Those buyers can be split roughly into three bands. There are the mega-funds that have been operating for a long time, that understand the process, are always at the table and have the firepower to do any transaction. This group is geographically agnostic and will get their heads around variables such as legal jurisdiction and cultural differences. There are at least 10 to 15 names in this category, including Cerberus, Apollo Global Management and Lone Star Funds.
Next, there is a second set that still may be very experienced and have between $1 billion and $5 billion to spend. Because they are smaller, they might be more focussed on a particular geography or property type. There are at least 50 of these, says Edmonds.
The third set can be described as being very asset-centric, such as on consumer debt, though they might be geographically agnostic at the same time. This set also could contain around 50 firms.
In the early stages of a financial crisis, the process of selling distressed debt might have involved contacting a group of 60 firms. However, as Europe is now into the sixth year of organizations selling off noncore assets, there has been plenty of “price discovery.” That is why Deloitte typically only invites up to a dozen parties nowadays and has been known to invite as few as four or five groups to a first-round bid.
This might help explain why there is a perception that the same buyer names crop up time and time again in Europe. The other truth to the matter is that, generally speaking, the buyers of European portfolios tend to be the same buyers that were active in past cycles. “The guys that have lived and breathed that are the ones that almost inevitably are at the table on the European transactions,” Edmonds says.
Don’t fade away
It becomes clear from Edmonds that one thing guaranteed to upset Deloitte – or at least affect a firm’s chances of participating in future sales – is the business of “fading away” in a process. This is the act of going quiet after having provided an indicative bid in the early stages of a sale.
“Over the last four years, one gets to see how certain funds behave,” Edmonds explains. “For us and to any selling bank, what is important is to do some upfront work, put forward a sensible bid in the indicative phase and not fade away in the final round.
Edmonds continues: “You see some funds whose tactics are to bid €120 million on day one, even though the portfolio might be worth just €100 million. However, that doesn’t work anymore. I can think of five transactions in the past month where we actually have eliminated the top two bidders in the indicative phase because we know they are not credible numbers.”
Indeed, Deloitte will sit down with a bidder during the indicative phase and go through their pricing line by line. “It becomes pretty clear whether they have done any work or not,” says Edmonds. “I think people understand that now, and we are seeing less and less of this tactic of putting in a high number and then fading away. In fact, people now are putting in sensible numbers during the indicative phase and actually going up.”
The highly competitive environment in Europe is one factor that might be responsible for bids increasing. Investors believe in the growth story in Europe, particularly in the UK and Ireland, and are starting to price in that recovery in value as a consequence. By contrast, one year ago, bidders might not have been certain which way values were going.
That said, the competitiveness also has led to a view in some quarters that perhaps the returns from distressed debt in Europe might not be stellar if prices are being bid up. Perhaps Edmonds would say this, but he comments that he has yet to see any evidence of anyone suffering from “buyer’s remorse,” even if prices do seem high in Europe.
“The interesting dynamic is I have yet to find anyone suffering from buyer’s remorse, or a seller regretting their sale,” Edmonds says. “We have an interesting matching of what the buyer and seller wants to achieve. Time will tell, as some of these things take a long time to resolve.”
Competition
With all this volume, isn’t it surprising that only a handful of advisory firms are active on the sell-side? As far as Deloitte is concerned, part of the answer has to do with team longevity. Edmonds notes that the most senior core team in Deloitte’s London office have been working together for at least 15 years.
In the essence, the primary players really are the Big Four accountancy firms to varying degrees, as well as occasional others such as CBRE, Lazard and Eastdil Secured. Investment banks are conspicuous by their absence. One good reason for that is that they used to be buyers of portfolios through various private equity channels, and sellers frowned upon the same bank being advisor to the sale as well as the buyer. The relatively unattractive fees to an investment bank also might be part of the reason for their absence. Nowadays, banks are more like to be lending to buyers of real estate debt portfolios than buying themselves.
One gets the feeling that Deloitte is in a strong position. As the ‘scorecard’ here shows, it claims to be a leader among the small number of advisory firms involved on the sell-side, with KPMG as its closest rival scoring a massive success advising the Irish Bank Resolution Corporation.
At least success is reasonably easy to judge. “Success is judged upon the successful conclusion of a transaction,” Edmonds says. “We get paid when the money crosses the table.”
Investor impressions
Here is a snapshot of what participants in European distressed debt sales say about the various sell-side advisors
Deloitte
Very active in selling portfolios on behalf of Lloyds Banking Group . Cerberus has been a frequent buyer.
KPMG
Has made a name for itself for winding down more than €20 billion face value of the Irish Bank Resolution Corporation’s loan book.
PwC
Said to be particularly active in Spain, where sales of real estate loans have become more regular.
EY
Perhaps has been more active on the buy-side in the UK and Ireland – estimated to be about €12 billion – but has advised on more sales than is commonly thought to be the case. Current mandates include Project Drive for Ireland’s National Asset Management Agency.
Lazard
Advised Royal Bank of Scotland on Project Isobel, a highly structured deal with Blackstone a few years ago. It also acted for NAMA in its largest sale to date – the offloading of Project Eagle, a portfolio with a par value of £4.5 billion, to Cerberus.
UBS
Not considered to be very active but recently advised NAMA on Project Tower, a loan book made to property investor Michael O’Flynn and sold to Blackstone.
Eastdil Secured
Owned by Wells Fargo Bank, the broker reportedly is acting for Royal Bank of Scotland on Project Button in Ireland. It also has acted for NAMA and for Lloyds in Germany.
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