For a market widely considered the bedrock of any European institutional real estate investment strategy, Britain boasts only a handful of UK-only focused private equity real estate firms.
Nestled within this limited cohort is Moorfield Group, a London-based firm well known in the country for generating strong returns, but equally well known for its reticence when it comes to seeking the limelight. Yet such a keenness for privacy contrasts with its deep-rooted history with Wall Street banks, US private equity firms and institutional investors.
Led by entrepreneur Marc Gilbard, the firm has scoured the UK for deals to match the value-add returns demanded by its investors since 1996. In that time, it has raised almost £1.3 billion ($1.62 billion; €1.5 billion) of equity for its Moorfield Real Estate Fund (MREF) series; deployed approximately £3.7 billion into 52 deals, using leverage; and realized 36 of those with an original cost of £3 billion. Over its 21-year history, the firm has generated gross IRRs of 27 percent and a 1.5x multiple (as of December 31, 2016). The fact Moorfield has rarely featured in PERE’s editorial – or any other media – has much to do with the private nature of Gilbard and his team.
That nature is palpable even before PERE’s recorder is switched on for this interview. Uncomfortable with having their pictures taken, Gilbard and his chief investment officer Charles Ferguson-Davie force their poses during the photoshoot and are visibly relieved when it’s over. It is a good thing the photographer finished 10 minutes into our 90 minutes together because they have a lot to say.
By Gilbard’s reckoning, Moorfield should be considered a firm that offers its investors “pioneering” and “innovation” in addition to “bread and butter” investments.
“We don’t just do the traditional; we do the alternative, and it is in the alternative that I look at us as pioneers,” he says. Gilbard promotes Moorfield as a firm that “pays its bills’’ from investments in traditional sectors, but which boosts its returns through capturing deals as new trends materialize. He stops short of describing his operation as a “first mover,” opting to label it an “early mover” instead, an approach demonstrated in its student housing and budget hotel acquisitions in the 1990s and senior living accommodation purchases in the 2000s. For each property type, the firm saw early signs of success elsewhere and was quick to pounce on the opportunity.
“Someone once said to me: when beating a path through the jungle, it is the person in the front of the line who takes the arrows,” he quips. “That’s a very important distinction to make. Early means you see a trend, research it, watch the failings and success of others and move forward on the basis that something is early in its gestation. That is what we do.”
At any given time, Moorfield will be concentrating on what it terms “conviction themes” – strategies dedicated to asset classes that are at the same time demographically and cyclically attractive for institutional investment.
Beds and sheds
Today’s conviction themes are: “beds and sheds.” Ferguson-Davie says: “We are right now concentrating on build-to-rent (residential), student accommodation and logistics. We’ll also do mixed-use because we can spot opportunities to break up schemes and sell to specialists and we’ll also be looking out for real estate that will benefit from new infrastructure investment.”
These themes will play out as Moorfield invests capital from its fourth MREF fund, which it is understood to be launching before the summer. Owing to marketing restrictions imposed by the US Securities and Exchange Commission, Gilbard and Ferguson-Davie would not discuss fundraising, but PERE has learned the firm is aiming to raise £350 million for MREF IV – more in sidecars – and this conversation is as good an indicator as any as to where that money will be deployed.
Like most private real estate investment managers, Moorfield is more concerned about the occupational trends of the UK than it is about the geopolitical debate now engulfing the country following last year’s referendum vote to leave the European Union. We are speaking shortly before Article 50 was set to be triggered by the UK government to start its two-year departure process.
When asked whether the Brexit vote had altered the firm’s investing thesis, Gilbard shakes his head. “Whether you are considering a rising populist culture and social change, the systemic undersupply and demand stemming from demographic and generational shifts, whether you are talking about baby-boomers taking over from the austerity-minded post-war people while looking at senior living, or the more transient younger generations for multifamily housing, something like Brexit is unlikely to change the momentum of these issues, nor will the rise of the far right. I think the greatest danger to these sectors would be a socialist-minded government coming in and imposing rental controls or other market restrictions and I don’t think that is going to happen.”
Ferguson-Davie chimes in: “There is also a big difference between London and some of the other UK cities which have less of a European focus.” Moorfield has historically been a big investor in the country’s capital city, but also its other ‘Tier I’ cities. Indeed, in the approximately £2 billion of assets currently on the firm’s books, it has holdings in Newcastle, Manchester, Liverpool, Leeds, Birmingham and Bristol, too, as well as Edinburgh and Glasgow in Scotland. “Demand for private residential renting over the whole country has risen from two million to five million in 15 years, partly because of affordability as people can’t afford deposits or meet affordability tests,” he says.
Similarly, Ferguson-Davie highlights how Brexit has nothing to do with people starting families later in life. “They are wanting more flexibility to move from one city to another, and this societal shift won’t be stopped by Brexit.”
The other big trend underpinning the “beds” part of Moorfield’s strategy is underdevelopment. “There has been a huge shift in demand to where there is limited supply and next to no development since the [global financial crisis]. A city like Newcastle, which is the fifth biggest in the UK with a population of almost one million people, has seen only around 1,000 completions of private residential units since the crisis.”
He points to students used to high-quality accommodation having to downgrade to outmoded period housing when they hit the country’s workforce.
In London, where the same issue is magnified and many cannot even afford to rent, micro-living is a theme now under Moorfield’s microscope. “We are at the research phase on that one,” Ferguson-Davie admits. “We have not invested, but find it interesting and see it fitting a gap between student and build-to-rent accommodation.”
Whether micro-living property makes its way into Fund IV remains to be seen. More certain is that retail property will not, with logistics playing proxy – the “sheds” component of the strategy.
Gilbard says: “We are not very interested in retail at the moment because we think there’s a huge amount of online-related impact still to come so we would rather play retail through logistics.”
Gilbard also harbors concerns about office values, especially prime central London offices, which have seen significant yield compression thanks to intense bidding by international investors and are today at cyclical highs. In fact, Gilbard has long-held reservations about the volatility of these assets: “A lot of international investors settle for offices in Central London. I say to them, ‘Look at the history of capital values – you can make or lose a fortune.’”
Gilbard predicts central London offices would need to fall about 20 percent in value before the firm engaged once again.
Underpinning Moorfield’s tactics are defensive considerations as well as growth prospects. Gilbard and Ferguson-Davie talk emphatically about protecting their portfolio against obsolescence as technological and behavioral disruptors evolve – both at the occupational level and on the leasing front.
Gilbard reflects: “When I came into the industry, we were predominantly talking about institutional real estate benefiting from 25-year leases with five-year, upward-only rent reviews. It was not unusual for tenants to sign up to that. But over the years, that has been the biggest erosion in the landlord-tenant relationship. For an office, you are now often looking at letting space on a five- or 10-year lease with a landlord contribution or rent-free period. In retail, it could be worse: three or five years are a norm and sometimes a turnover-related rent.”
Gilbard’s disparaging outlooks on the leasing aspects of these two sectors emanate from behavior in the global financial crisis, a particularly difficult time for Moorfield and its peers, which taught him a number of lessons the firm heeds today.
“These sorts of things are of material concern to me when discussing traditional spaces,” he says. “For the investment themes we’re focused on now, we have realized 25 investments delivering a 41 percent IRR and 2.1x equity multiple. In many respects, the current themes we are focused on have delivered our strongest track record.”
Friends in high places
Moorfield’s roots are firmly ensconced in the US. They hark back to Gilbard joining Wall Street titan Goldman Sachs in the early 1990s to set up a real estate equities business and write the bank a business plan for committing principal capital into the UK property market. Commonplace today, Goldman’s strategy of combining house money with third-party, institutional capital for real estate investing was a rarity then. Gilbard played an integral part of establishing the UK chapter for the bank’s global opportunity fund series, the now-legendary Whitehall Street funds.
It is in this part of the discussion that it becomes apparent just how high profile the company Gilbard was keeping at that time. His Goldman colleagues were industry legends Daniel Neidich, now chief executive of Dune Capital; Michael Fascitelli, the former CEO of Vornado Realty Trust; and David Hamamoto, the executive vice chairman of Colony Northstar. “They wanted to use the UK as a staging post for the rest of Europe,” Gilbard recalls. “Goldman asked for a business plan for the UK and that’s what I gave them.”
But it was in constructing this plan that Gilbard spotted a gap and determined that Goldman needed to invest via a series of local operating partners. “Now that’s terribly obvious,” he says. “But when they asked, ‘Who shall we work with?’ that was more of an issue. There were some very well regarded and established UK businesses, but they didn’t buy into the PE model, nor did they have to. They were either listed or well-funded private businesses. The types of businesses that were particularly open to wanting a partner were the ones which were capital-starved, and frankly these were not necessarily the highest grade of partner.”
That discovery led Gilbard to leave Goldman Sachs alongside colleague Graham Stanley (still a board director) with the sole purpose of becoming the operating partner of choice for institutionally-capitalized US private equity firms wanting to acquire property in the UK. “So I left Goldman Sachs in 1996 and did a management buy-in to what was a financially distressed company on the London Stock Exchange called Moorfield Estates. Our name hasn’t changed a huge amount.”
What ensued was a decade’s-worth of standalone transactions with firms including Blackstone and Westbrook Partners and the creation of a deal-by-deal track record that in 2005 boasted an impressive approximately 60 percent IRR average and 2.7x equity multiple. Among these deals were some of Blackstone’s first non-US acquisitions. “They were very early in the BREP series and hadn’t invested meaningfully outside the US up to that point. My contacts were [current Blackstone chairman] Stephen Schwarzman; [Blackstone founder] Pete Petersoner; and [Blackstone’s first real estate head] John Kukral. I remember flying back and forth to New York to meet with them. We did two or three successful deals together.”
Moorfield stayed listed until 2001, when its management, with the help of a loan from the Halifax Bank of Scotland, privatized the business. It was four years later, once the firm had built up its deal-by-deal record serving principally US institutional money, that it embarked on its first fundraise, effectively morphing from a partner to investment firm, into a competitor both for their capital and their deals. “A number of our partners had used our name in their reports to their investors and so we had become familiar to some pensions and endowments.”
Candidly, Gilbard recalls the raise of £265 million for MREF I to be “relatively easy.”
By the time the global financial crisis struck, Moorfield already had raised MREF II, which closed on £390 million in 2007. With Fund I’s investments taking the impact of the crisis head-on, the firm decided to sit on Fund II’s capital in anticipation of a recovery, a move that in hindsight may have been a saving grace.
“We sat on the majority of that capital until 2011 and from then up to 2013 we deployed it,” he says. “So that was a good fund. We were buying at the bottom of the market. The third fund [MREF III, which closed in 2014 on £350 million] is now fully committed and, mark-to-market, is performing similarly to the second fund – a very good return profile.”
In addition, Moorfield runs a fund entirely dedicated to retirement villages called the Moorfield Audley Real Estate Fund, which closed on £200 million last year. That vehicle was seeded with assets from the firm’s earlier funds and created partly to give those funds’ investors an opportunity to keep their exposure to their assets.
Despite the boutique size of its funds, the investor deck of Moorfield, like its early investment partners, is a who’s who of the institutional world. According to PERE data, Moorfield funds have received commitments from investors including pension funds like the California State Teachers’ Retirement System and Texas Municipal Retirement System, as well as endowments such as the University of Michigan and Rockefeller Foundation. There are multi-managers in there, as well, including Carlyle-owned Metropolitan Real Estate and Composition Capital Partners.
Moorfield has also received backing from European investors, including Dutch pension manager MN and Danish pension managers Industriens Pension and PFA Pension. But it is from the US where the lion’s share of the firm’s capital support originates – a possible concentration issue to contend with. Manish Chande, senior partner at UK peer private equity real estate firm Clearbell Capital, says: “Because they started fundraising pre-GFC, it was the Americans that were the biggest supporters. Once you have that support, they generally will repeat invest with you.”
Clearbell, too, has enjoyed significant US support, but Chande believes American investors have excuses to keep more of their resources on home soil. “I see two things: investors seeing Europe as a bit of a basket case that could potentially implode. That could be an opportunity or it could lead to caution. It will be more challenging to find new investors in that landscape. The second thing is ‘The Donald’ factor. A perception among US investors is that the US might do rather well with ‘The Donald’ and that will have an impact on US capital coming to Europe.”
Sean Slade, founder of one of Moorfield’s asset management partners, Appley, adds: “Yes, they have a big US exposure and I suppose to some people that is a bit of a risk. But he does have other investors, too. Marc is very much aware of expanding the investor base and has been looking all over.”
“I see that as more of an opportunity than a risk,” says property agent Savills’ joint head of UK investment, Richard Merryweather. “Their American money will be committed, but at some point in the future you’d think Marc and his team will look at other parts of the globe for other funders.”
Asian capital is one obvious area for further capitalization and with an increasingly viable investor base growing in China and Japan, that much is not lost on Gilbard, although, to date, their appetite has been more for direct purchases of prime real estate than indirect tickets into higher risk and return strategy funds. “They have grown more familiar and comfortable with investing in vehicles, but it is still early days,” Gilbard says.
It is also not lost on Gilbard that certain Asian investors, like Moorfield was in its early days, are keen to disintermediate the manager by owning it, as China’s Fosun Property Holdings did when it purchased the future business of another London-based private equity real estate firm, Resolution Property in 2015. “We get approaches from the Far East about investments in the GP,” admits Gilbard. “But we have no desire to sell any part of the business.”
Moorfield is entirely owned by its management, with Gilbard owning the largest share. “I’m only in my early 50s and Charlie here is just turning 40, so there’s no rush to do anything with this business. It has succession and longevity.”
With its enviable track record restored following the crisis and a new offering incoming, there is plenty for Gilbard and Ferguson-Davie to be getting on with, plenty of ‘early moves’ to make. And judging by the increasingly animated rhetoric from Moorfield’s boss as we draw to the end of our conversation, it is clear the enthusiasm within this operator-turned general partner has not waned, even after 21 years. It’s a small wonder, then, that this particular Englishman wants to continue to go about his business with little fuss from the outside world.
Headcount: 26 professionals
Fundraising since 2005: approximately £1.3 billion
Capital invested: approximately £3.7 billion in 52 deals
Capital realized: approximately £3 billion of original cost
Returns realized: gross 27 percent IRR and 1.5x equity (gross 41 percent and 2.1x equity for the MREFIV themes)
Moorfield’s milestone mega-sale
The £1bn sale of tail-end assets from its first two funds to Lone Star was a pivotal moment
In February 2015, Moorfield completed the £1 billion sale of a portfolio of assets from its 2005 MREF I and 2007 MREF II funds to Dallas-based Lone Star Funds. In so doing, it consigned one of its more difficult chapters to the history books.
The portfolio, which included well known assets like The Salisbury, a 236,000-square-foot, Grade II-listed building in the City of London; Pinnacle, a 19-story mixed-use building in Leeds; and The Towers, a business park near Glasgow, was amassed before and after the global financial crisis.
As a consequence, its sale crystallized contrasting results for the two vehicles. While MREF II is understood to have met its 15 percent net IRR and 1.5x equity target, MREF I chalked up a return of less than 1x.
“That fund went straight into the teeth of the GFC and so it’s fair to say it was a poor return. I was disappointed for us and for the investors, relative to what we had managed previously,” Gilbard says.
Nevertheless, the sale enabled Moorfield to draw a line under MREF I, underline the positive outcome for MREF II and dedicate more focus to its future opportunities.
“Lone Star approached us and said, ‘We know these assets are coming due for sale over the next six to 12 months. Why don’t we buy them in one transaction?’ We decided that would be easier than undertaking multiple deals… The market peaked three months after selling.”
Sean Slade, managing director of Appley, one of Moorfield’s asset management partners, worked on some of the portfolio’s properties, including Salisbury House. He recalls: “They did extremely well getting out at that time. There were a few assets with a little way to go in terms of performance, but it needed to be attractive enough for someone to buy it. I’d say Moorfield’s ability to put together a portfolio like that and the timing were remarkable.”
Views from the sidelines
Manish Chande, managing partner, Clearbell Capital (peer)
On Gilbard: “He’s an able guy steeped in real estate. He’s quite intense, which I like.”
On the Lone Star sale: “The deal he did with Lone Star was a good deal for his investors. To be able to sell £1 billion of assets but also to retain the management, I think that’s pretty clever. That takes nous to do.”
Richard Merryweather, co-head of UK investment, Savills (advisor)
On Moorfield: “They’ve always been focused on certain markets and have had a clear idea of what to do.”
On MREF I: “I’m not sure anyone saw that coming. The performance at that time might be disappointing, but, given the context, everyone threw money into the market. That was all about making the most of your situation and I know they worked hard through all of theirs.”
Sean Slade, managing director, Appley (asset manager)
On Moorfield: “They have a good balance between pure property people and those with a finance background. When a deal comes along, there’s a lively debate with different viewpoints and ultimately, that blend of discipline probably gets them better answers than perhaps other organizations come to.”