Principal and Internos merger to add momentum to pan-European core funds

Principal Global Investors’ takeover of Internos Global Investors is likely to add further momentum to Europe’s growing open-ended core property fund sector.

The US investment manager announced last week it is merging its $74.9bn (€63.8bn) real estate arm with the €2.75bn fund manager Internos, providing it with a European platform.

Principal Real Estate Investors is one of the world’s largest property fund managers, but unlike many of its US-based rivals it has yet to expand its direct real estate activities into Europe or Asia-Pacific (it is active in this regions indirectly).

So while, Principal is ranked 12th in IPE Real Assets’ recent global ranking of real estate investment managers, it is actually larger in the US than third-placed TH Real Estate, fourth-placed Blackstone and sixth-placed CBRE Global Investors.

The acquisition is not about providing further scale – Principal’s real estate business is more than 20 times the size of Internos – but it does provide a pan-European platform from which to expand into the region.

Not only does it have ‘people on the ground’ across the region, with more than 100 employees working from eight different country offices, it is also regulated in the UK, Germany and France, and has a presence in Luxembourg. This means, for example, it can manage UK limited partnerships, German institutional Spezialfonds, French retail money and Luxembourg structures.

While Tim Stumpff, CEO of Principal, told IPE Real Assets that Brexit had not been a deterrent in its ambitions to expand across the Atlantic, these multiple jurisdictions may prove useful for the US-based manager as the UK prepares to leave the EU.

AIFMD regulations require an EU presence or ‘passport’ to market to EU institutional investors, so having a degree of “optionality” – as Jos Short, executive chairman of Internos, termed it – is likely to have appealed to the US-based company.

Short has some experience of managing a European arm of a large US-headquartered real estate manager. He was CEO of the European business of PGIM Real Estate (formerly Pramerica) for seven years before co-founding Internos in 2008.

So does his co-founder Andrew Thornton, the former COO of Invesco Real Estate’s European business. Today, Invesco manages one of the largest of a growing universe of pan-European core property funds.

Internos is one of the newest entrants to this market, having launched The Internos Core European Balanced fund in May with backing from clients of The Townsend Group.

Launched with €135m of cornerstone capital, Internos said it hoped to increase the size of the fund to €2bn over time. With Principal’s capital markets team now on board, this could happen sooner than originally envisaged.

While Europe’s open-ended core fund sector has grown in recent years – to €17.5bn in September, according to MSCI – its US equivalent is more than 10 times bigger, at $181bn at the end of October, according to NCREIF ODCE index. Principal manages one of its large constituents, the $9.49bn Principal US Property Separate Account.

There is a notable parallel to Barings Real Estate Advisers, the real estate arm of MassMutual insurance company. The European arm of Barings was formerly Protego Real Estate Investors, acquired by MassMutual in 2009. Today, it is also raising capital for its own open-ended European core fund, while managing a large US open-ended fund, the $3.3bn Barings Core Property Fund.

According to Short, Internos and Principal’s plans for Europe go beyond core. Internos has already been active in higher-return opportunistic strategies through a joint venture with Oaktree Capital, and Short said there were plans to pursue opportunistic investments next year.

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