At the very start of the downturn, Andrew Thornton joined forces with Jos Short to set up an opportunity fund. He talks to Richard Lowe about how a change in strategy led to Internos managing €1.5bn in European assets in just under two years

It was a brave thing to do to start up a boutique real estate fund management business in 2008, even if Andrew Thornton, former chief operating officer at Invesco Real Estate, and Jos Short, former chief executive of Pramerica's real estate private, were not short of experience and reputation. Two years later and the gamble paid off: through the acquisition of GPT Halverton, their company Internos manages roughly €1.5bn in European real estate assets.

"No matter how good your previous track record and reputation is, it's still very different when you're there as a start-up firm rather than as an already-established large fund management business," Thornton says. "We wanted to build a proper European fund management business, but we recognised the challenges of doing so when starting from scratch."

The initial strategy was to launch a pan-European opportunity fund, an approach that suited a small but nimble start-up outfit. "You don't need to have your own teams on the ground in order to be a good opportunistic private equity style investor. So when we started back at the end of 2007, early 2008 we were quite encouraged by what we saw, because the markets were starting to re-price and we could see there were changes and a reduced amount of capital," he says.

The plan seemed to be on track for much of 2008, during which time Internos met with the best part of 100 investors, according to Thornton. But it wasn't to last. "The capital raising was going well until we hit the end of the year when Lehman went bust and at that stage the market froze."

With hindsight, Thornton sees this eventuality as being a positive development, although it seemed like bad news at the time. "The good news is we hadn't raised money earlier and deployed it, because then we would have had legacy issues," he says. "The bad news was obviously that it was incredibly difficult for anybody at that time to raise capital. It was almost as though investors had pressed the pause button to work out what they already had, rather than what they wanted to have going forward. So, yes, the end of 2008 and early 2009 was a difficult time because we had to change our strategy."

It was a frustrating time for Thornton and Short because they knew they could not continue with their plans to raise an opportunity fund, but all the while they saw opportunities in the core markets emerging all around them. "It was a good time to deploy capital, but we didn't have any to deploy and it was very difficult to convince investors that it was the time, even though in their hearts of hearts they probably believed us."

Thornton said the move by the Australia-based GPT Group to sell its European real estate fund management arm presented Internos with the opportunity to "leapfrog our business plan" and to put together "a very solid European platform much quicker than we'd really expected to".

Much of the work for Internos since then has been focused on stabilising and consolidating the business that was acquired for a symbolic €2. "The first thing we wanted to do was to make sure we had the GPT Halverton and Internos businesses fully integrated and stabilised," he says. "Everyone knew that Halverton had been losing money and we needed to turn that round. So the big focus in the first half of this year was to integrate the businesses, re-launch the Internos brand, and to make sure all the internal processes and systems were aligned and were as efficient as possible."

Part of this process involved selling a large German industrial portfolio to Hansteen Holdings for €300m. Internos also closed its Berlin office, and reduced staff across the business from 101 to 67, while also employing the expertise of Mark Burton, former chief investment officer for real estate at the Abu Dhabi Investment Authority.

The intention was for the business to begin to at least break even. "We now have the situation where recurring cost is covered by recurring revenue, and this year we should turn a profit," Thornton says.

Having consolidated the business, Thornton says the firm can begin to think about expanding and pursuing new opportunities. With the consent of investors, Internos has geared up its German retail property fund with a view to making new investments for the first time in a couple of years. "There are a number of transactions going through due diligence, so it's good to have the business back in acquisition mode, rather than disposition mode," he says.

Internos is also looking to work with investors or banks on existing situations, whether it be "stepping into the shoes of an existing manager or to work with a bank on the asset management work-out of a portfolio", Thornton says.

The firm also has an eye on recapitalisation opportunities. "That is in many ways deploying the skill set that we would have deployed for an opportunity fund, but probably more on a separate account basis at this stage," he adds.

So what does Thornton think of the future prospects of the traditional opportunity fund model? "I think the crisis has challenged the fund model per se, not just the opportunity fund model," he responds.

"Everything is cyclical and the fund management industry is no different. At the moment, there is a retrenchment to separate account mandates with investors having much more control, having the ability to make the decisions, or doing joint ventures rather than deploying capital into blind pools funds where the investment manager has all the control. And at the most extreme end is the opportunity fund where inevitably it's blind pool, inevitably there is more risk, more reliance on capital structuring, and a much more difficult asset to underwrite and to control in the event that you want to get out early."

But Thornton believes that the industry is at a turning point. "Investors have been hurt by their experience and there are a lot of investors who have little confidence if they look at fund offerings at the moment," he says. "The challenge for investors and for the industry is how to build a proper partnership so that new funds can get through the first close and launch."

He adds: "Everyone has to be realistic about what they're doing. People who are launching funds have to make sure those funds have a high probability of success in terms of raising capital and then deploying it. If we're going to rebuild the trust with the investors we've got to make sure we run things much more efficiently than in the past, whether that's the cost associated with the fund, whether it's the timelines for decision-making, whether it's the interaction between the capital and the manager and the discussions and the dialogue that we have with tenants. It's all got to be a lot more honest, open and efficient."