Can Principal Financial's acquisition of Internos Global Investors be likened to that of Liongate four years ago? CapitalWatch editor Robin Marriott looks at timing and culture issues, and, more importantly, what each party stands to get out of the deal.
Let’s hope Principal Financial’s acquisition of Internos Global Investors turns out better than a previous acquisition did. In 2013, the US group acquired a majority stake in Liongate Capital Management, one of London’s best-known investors in hedge funds, which at one time managed $3.4 bn (€2.9 bn) of assets.
However, just two years later Principal decided to shutter it after investors withdrew too much money. Numerous reports at the time made the link between investors being reluctant to pay double fees for a hedge fund of funds manager and Liongate’s collapse.
However, the headwinds of the hedge fund industry and the fund of funds model are different to that of real estate and Internos’ model, so we wish all parties well in this new chapter. Internos provides Principal Financial with a bridge to European real estate. It will have analysed the opportunity and assessed if the timing is good. We are told a debt product is on the horizon, and certainly Jos Short, co-founder of Internos, would like an opportunistic fund.
Is the timing right?
No doubt strategies will be worked on before even the ink has dried. Apart from the obvious question about whether the timing is good given where we are in the European property cycle, the other noteworthy aspect to this acquisition involves our old friend when considering takeovers/mergers: culture. Let’s be honest, US-European relationships can often be fraught. I myself have worked for an English European-based company where at the time US people called the shots. The ‘plus’ part of the equation is usually that the US firm is a benefactor with deeper pockets and larger infrastructure. But sometimes that doesn’t compensate for, how shall we put it, ball ache.
Well then, I have said it. Messrs Short and Andrew Thornton – the other co-founder of Internos – have that to look forward to. But to be fair, they have both worked for US organisations before (PGIM and Invesco) so they certainly know all about it. And, on a conference call both parties to the deal said the culture fit was good.
While this column may sound sceptical about the tie-up, it isn’t meant to be. The hiccup with Liongate of the hedge fund world was part of Principal’s long-term European expansion plan, but the difference with Internos is that it is a direct investor and Principal has vast experience already with real estate. After all, it has $74.9 bn of AUM in the US.
The hedge fund of funds industry changed faster than Principal would have liked and while real estate may have equally seismic shifts such as the downward pressure on fees for many managers and the gravitational pull of investors towards larger asset managers, Internos has remained strong as a going concern. The firm says it wasn’t looking for a buyer at all and was happy to continue on its own.
Path to growth
It is admirable to see a company that started out in 2008 find a path to the next growth phase. Remember, Internos started during inauspicious economic times. It had a good backer in Richard Peskin, an ex-chairman of UK property company Great Portland Estates. But the firm was nevertheless unable to go out and raise a fund immediately. Instead, it went about building a reputation for astutely taking on work-out situations, thus assembling assets under management and raising market profile.
The game changer arrived in December 2009 when Internos acquired GPT Halverton, a wreck of a company made by over-eager Australian REIT, The GPT Group. Suddenly, Internos had offices in London, Amsterdam, Berlin, Frankfurt and Luxembourg. Internos paid a nominal sum of €2 to work out the assets and managed to get a transfer of €7 mln working capital to sort out the mess.
From very little in its first year, Internos became a substantial firm with an established platform. You have to tip your hat to them. Those in the market unrelated to either party say financially this is a very good deal for Internos. The two parties have been talking for at least a year about this takeover, and nothing has put them off so far, not even Brexit, which in itself is a question mark. Principal prefers not to flesh out its plans directly yet. The message is: Internos represents a long-term investment and Principal will be patient. What we do know is the Internos name will disappear, so get ready to read more about Principal Real Estate Investors Europe.
Robin Marriott is editor of PropertyEU CapitalWatch
