Banks are offloading ‘non-core' assets in every sense of the word, which is why Patron Capital Partners has been so active in hospitality and healthcare. Richard Lowe talks to founder Keith Breslauer
Dublin saw the launch of Ireland's largest hostel in October. The Generator Hostel in Smithfield Square does not adhere to the traditional image of budget backpacker accommodation. The former whiskey distillery has been refurbished complete with modern interior design, a 40-foot graffiti mural designed by local artist James Earley and bespoke Jameson whiskey bottle chandeliers.
This new breed of hostels (the Dublin building is one of a number of Generator Hostels located throughout Europe) represents a trend more established in the UK student accommodation sector, where high-quality, modern apartment blocks are becoming the norm in university cities. For institutional investors, student housing is still considered a niche investment sector, as is hotels. But both look positively mainstream compared with hostels.
But for Patron Capital Partners, which invests on behalf of a number of institutional investors predominantly in the US but also in Europe, the acquisition of the Generator Hostels - including a pan-European portfolio of hostels and its operational business - represents the largest investment for its last fund.
"We believe in the business," says Keith Breslauer, founder and managing director at Patron.
Belief in individual businesses is central to Patron's investment strategy, which focuses on acquiring operating companies underpinned by real estate.
The opportunistic fund manager's most prominent deal in recent weeks was the acquisition of 24 hotels from distressed hotel group Jarvis, in a joint venture with West Register, the Royal Bank of Scotland's (RBS) troubled assets specialist subsidiary. The portfolio of branded hotels had been languishing in RBS's restructuring unit since owner Jarvis defaulted on its original loan more than 18 months ago. Jupiter Hotels, a 50-50 joint venture between Patron and West Register, has been established as part of the deal, and hotel operator Accor will assume management under the Mercure brand.
"It was an extremely complicated deal," says Breslauer. "We worked on it for nine months. The deal included replacing existing "expensive" leases, restructuring and reducing the debt, arranging a new franchise agreement and branding with Accor, and working with West Register as a co-investment partner. "It is back on track to be a healthy business," he adds.
Patron has also been very active in another alternative sector - healthcare. But the fund manager is not focused on alternative sectors by design but, rather, as a product of market opportunity.
"We are a distressed, opportunistic investor," Breslauer explains. "Banks are looking to sell off their non-core assets, not necessarily their core assets. I think the mistake that has been made by a lot of new entrants has been to assume that these banks are going to unload billions of euros or pounds of [core] assets. We don't believe that is the case.
"What is more likely is that they will focus on what they call their non-core assets. Now what is non-core? Non-core could be a country, like RBS selling Spanish loans, or could be where a residential lender sells off the loans it made in commercial [property]. Hotel and healthcare are deemed sufficiently distressed and non-core to be interesting. And that is why it turns out that we have hired our own big healthcare and hospitality teams."
Patron has a four-strong healthcare team and five hospitality specialists, among its 66 staff based across Europe. This is evidence that the fund manager not only allocates capital to deals and backs other local operators. "We have joint ventures with a lot of people," Breslauer says. "But the reality is we do a lot of it ourselves."
For this reason, Patron is very much an opportunistic manager - Breslauer is entirely comfortable with this description - but the firm also pursues a somewhat hybrid business model, which falls outside the traditional capital allocator versus owner-operator debate (where the former backs local real estate operators with client capital, but does not have direct real estate expertise, and the latter makes direct property investments on behalf of investors).
"We tend to be in that mid-market to smaller group size, so we tend to be viewed as an entrepreneurial organisation," Breslauer says. "What Patron Capital is not is a purely asset-allocator business".
Historically, Patron's investor clients have been predominantly US institutions, including university endowments, looking to invest opportunistically in Europe. Breslauer says the proportion of European investors in its client mix has increased from 10-15% to approximately 30%. "What is interesting is we are getting a lot more attention than we normally see out of Europe," he says. "The Europeans are really back, driving it."
He says this is not only a reflection of "how Americans view the state of Europe", but also representative of the fact that European investors know there are distressed opportunities to be had in their domestic market.
"European investors have historically not invested with us, because we are a blind pool," Breslauer says. "If you have a building, there will be 15 European investors; if you have a pool of capital, which you can commit money to and invest over time, there are very few guys.
"Post-crisis, [European investors] smell an opportunity. They think there is a lot of distress out there; they just don't know how to access it and they don't know how to turn it around. We're, in theory, becoming attractive to those guys because they understand the market, they understand the asset class, but what they don't understand is how to actually buy it."
European investors might also appreciate the relatively low levels of leverage employed throughout Patron's 12-year history, during which time it has managed five pooled funds and one segregated account.
"We're not a leveraged game buyer," Breslauer says. "We're not trying to buy something levered and sell it. In fact, I think the reason why we are alive today is the average leverage in our prior fund was around 35%, which is significantly lower than normal." He adds: "People often think when I quote that number that I got it wrong."