Four years ago, the best GPs in Europe were pretty confident of something: the competitive landscape would alter radically in their favor because others would falter. They may have been proved right, but not necessarily in the manner predicted.
Back in 2009, feisty GPs pictured limited partners in dozens of poorly performing funds being so upset they would engineer a removal or change of manager control and come begging at the door of the larger and empowered asset manager. In reality, while industry consolidation certainly has occurred, it has not happened much in this way.
In fact, as things have turned out, there has only been a trickle of portfolio and manager takeover cases in Europe, with Tristan Capital Partners recent takeover of Corestate Capital’s Germany Commercial Properties Fund being one of the few examples one can cite.
“We are not seeing as much as we thought,” said one person whose firm has participated in European industry consolidation, venturing a theory. “It is down to LP inaction and the need for a big percentage of LPs to vote to remove or change GPs,” he added.
One can add the fact that it is “no party” – as one large LP put it to PERE – removing a manager/GP in terms of process, handover and costs. Furthermore, because LPs and GPs involved in a change of control prefer to keep a lid on their affairs, there might be more cases than are in the public domain. (Indeed, in the Tristan/Corestate case, all parties apparently signed confidentiality agreements, so this was never meant to be public.)
Still, when market participants are asked to name instances of a change of control, they are hard pressed to come up with even 10 examples. There was LaSalle Investment Management taking over JER Partners Europe, Valad Europe taking over GE Real Estate Poland, Palmer Capital Partners taking over Invista Real Estate Investment Management and several takeovers at the smaller end by Internos Global Investors.
Of course, the examples that have cropped up have different situations – unique in fact – and that is the case with Corestate with Tristan. Despite that, experts said change of control situations typically tend to fall into four broad categories: limited partners are unhappy with the performance of the general partner; banks have control and are unhappy with the GP; the board of directors of a listed company has decided to replace the manager for whatever reason; or a company decides to shut down and out of that comes a manager replacement opportunity.
The question now being asked in the wake of the Tristan example is how many more cases there might be? In all likelihood, the answer is ‘some’ – indeed, PERE has heard of one more in the offing for later this year – but the deluge hasn’t happened and probably won’t happen.
Experts point out a new factor that seems to suggest fewer rather than more activity. With some US investors showing greater appetite for opportunistic funds in Europe, managers are more focused on raising capital than in the painstaking, troublesome task of taking over other group’s vehicles.
So, the competitive landscape has changed in the favor of stronger performers as originally predicted. However, it is not so much the change of control at legacy funds that has proven to be the defining Darwinian factor. Rather, it is the ability to raise fresh capital.