Blowout, collapse, rubble, ashes, consolidation, takeover - these are words we have heard a lot in the last few years as the -industry downturn has claimed victim after victim, manager after manager, leaving many investors high and dry. But here’s a deal with a difference - one where all parties appear to win. Noel Manns talks to Martin Hurst about Europa Capital’s success, its new strategic investor and what this means for the fund manager and its investors

It was a bitterly cold January day when I visited the offices of Europa Capital but inside their offices on Sloane Street an eagerness to get on with the next stage in the company’s development was palpable.

The industry shakeout has seen a wave of consolidation as managers that rode the wave of excessive leverage in the boom found themselves swamped when the market tanked.

But last October, in a deal that bucked the trend, Rockefeller Group International - which has been owned by Mitsubishi since 1989 - acquired a majority (75%) strategic stake in Europa Capital in a deal that would leave the ‘minority’ shareholder in charge of investments within Europe.

Currently Europa Capital has around €2.5bn under management. Mitsubishi Estate Co, the second-largest listed real estate company in Japan, has an investment management business with around $20bn under management. The Mitsubishi/Rockefeller rationale for the deal is clear, according to Noel Manns, co-founder and principal at Europa Capital. “They want to expand out of the Far East through Rockefeller and, via their strategic investment in us into Europe, ‘the other third of the world’. They want to internationalise,” he says.

There are, of course, many managers with significant expertise in Europe. So what was the attraction of Europa for the strategic investor? “Much as I would like to bang our drum we may have self-selected a bit,” Manns says. “Through our network of local partners we are truly pan-European. There aren’t many truly pan-European players, and fewer still who don’t already have a business in the US or Asia.” To date Europa has invested in transactions of around €7bn in a variety of transactions across 17 countries.
From the perspective of Europa Capital the rationale isn’t immediately obvious. Europa’s focus has traditionally been entrepreneurial private equity real estate related investment. But therein lay the issue. “In the annual January [2010] get-together of the five founding partners we recognised that we wanted to expand the business and that as a single-style house - opportunistic - we would need to broaden our product and strategy offering in order to grow.”

Europa Capital will now be moving into the core and core-plus space, a move which, given the company’s focus, few would have believed possible a few years ago.
What do their investors think about this? “In a very uncertain world the fact that we are the same people doing the same thing but with a very strong balance sheet behind us - that is a very good thing,” Manns says. “One or two investors may not want us to diversify the business as much as we would like to - they want us to be a one-track manager, but that is not a solution. Will those same investors back a single-track model - will they invest in every fund we produce?”

Diversification is a strong theme here. As a fund manager based in Europe, Europa Capital is unusual in that around two-thirds of its investor base is in the US. Traditionally US investors have looked to Europe for higher returns and this has been a good fit for the business. So expansion of the client base needs to take place elsewhere. As Manns explains: “Rockefeller will introduce us to some new people and a high priority is to attract more European investors, as well as investors from Asia and Australasia. This diversifies the business.”

Manns sets out a logical reason for the strategic investment: the demand from investors for more co-investment. “People are more risk averse these days and want more commitment from the general partner and reassurance that the manager isn’t just taking fees. We’ve always co-invested but to a limit of 15 or 2% of the funds - that is all we could afford, and we borrowed that. The strategic investor will co-invest in every fund so we will be able to go to the market with a level of co-investment that is much higher - up to 10%.”

Even though Manns and his colleagues wanted to grow the business out of its traditional opportunistic sphere they were not looking for a strategic partner. “We were approached out of the blue,” he says.

The co-investment and growth story are appealing, but what of Europa Capital’s long-cherished independence? As Manns says: “Did we really want to do this? We are entrepreneurs and were used to doing things our own way. The critical point was that the strategic investor agreed that all the investment decision making in Funds on the European side of the business would stay with the existing Investment Committee - the three of us - Charles Graham, Peter Cluff and me. They offered that up front. This is really important: investors look at people, not organisations. Another key point was that like us they are true real estate people, not financiers.”

Confidence is another major theme running through this strategic investment. As Manns explains, “with the strategic investor encouraging us, we can expand; we will have the confidence to raise maybe three or four funds at the same time. We will have a more solid base for management to conduct business.”

The lending climate is a key driver of market growth, but the current bleak outlook is not all bad news. “I do not see it getting better for at least 12 months as many banks are still making losses,” Manns says. “I also expect that the banks will have to start realising some of their assets. The banking market will remain soft and there will be little lending for the secondary stock released by the banks, much of which will have problems because it will have been in a banking environment for three years so may not have received the necessary investment and tenants may have moved. The lack of lending is likely to force down the value of this type of stock further before equity buyers take an interest. For an opportunity fund this is interesting.”

Leverage has been the downfall of many managers who rode the euphoria of the boom years, some blind to any prospect of a market correction. It is also the reason for Europa’s stable position today. “Leverage was a one-way ticket,” he says. “Our average leverage was 64% which for an opportunity fund is quite low. Perhaps we under-performed for a while because our returns were not as high as those with higher leverage. This is no longer the case, of course.”

As a pan-European investor Europa Capital has also had to consider the sovereign debt crisis. Manns believes that sovereign risk isn’t being priced into property yields. “An investor must have additional return if it is going into a country where there is a risk that it may exit the euro in the future,” he says. “There is dislocation - the ‘PIGS’ have some very deep problems, (these are different), so you want a further risk premium.

“Another important matter is liquidity: some markets on the fringe became very illiquid when the gusher of credit, which washed across Europe, was turned off. The money was either lost or drawn back to London and Paris and other larger markets. So what do you do in an illiquid market? Do you sit tight and wait for liquidity to come back? That’s not a very clever strategy but it may be all that you can do. For the time being it is better to be active in the reliably liquid markets; “there will always be opportunities in markets like the UK, France and Germany that account for circa 80% of transactions in Europe at present. Some of more peripheral markets will be inactive for a while.

“But when the price is right the strategic investment will offer exciting opportunities. A pan-European fund offers the possibility to invest wherever the opportunities are. But we believe that there will also be interest from groups of investors to invest in funds focusing upon more specific investment categories be that Polish retail, central London offices or Nordic logistics!”

For example, the UK logistics sector has been a focus for the company recently. In October it established a joint venture with global property group Goodman to develop sites across the UK for distribution and logistics property across the UK. Europa also has a joint venture with M7, an active manager of UK industrial property.

Further investments include land. “We have been buying land relatively cheaply at the moment; nobody is buying it because nobody can develop on it,” Manns explains. “But in three years the land that nobody wanted will be very useful. Housebuilders’ balance sheets have been stretched and they can’t afford to hold land as they used to. In due course they will need the land to put buildings on and they will buy it back off us. That’s the outlook - those are a few ideas - the ones we’re doing already.”

With these ambitious plans the business, like any other successful business, will rely on people to drive progress. Europa’s profile is changing; what does this mean in terms of leadership? “We will not spread ourselves across the business,” Manns says. “We will do what we have been doing, which is opportunistic; new teams will be recruited to create the core part of the business. As a result of the transaction we will be broadening ownership with the appointment of new partners; this also provides the management with a succession plan.”

The expertise will also be garnered via joint ventures, such as that formed with Feldberg Capital in October last year to manage Europa Capital’s core business in Germany.

In the last three or four years Europa Capital has doubled in size but is keen to emphasise that there are no major expansion plans in store. “In terms of manpower we have 40 or so people and we may grow from that,” Mann says. “I hope that we will grow our assets under management by a third in two years. We will grow but we do not aim to become a big shop - that’s not our style.”