DEAL IN DEPTH: TPG turns to Ireland in search of distress

US private equity firm TPG is extending its search for distressed real estate to Ireland after gaining control of Woolgate Exchange in London's financial district and a mixed portfolio in the Netherlands through CMBS workouts.

Kelvin Davis, managing partner at TPG Real Estate, the property platform of the global private investment firm, told PropertyEU that TPG will in the near future be looking increasingly at Ireland where there is an 'urgency' to get rid of the most distressed and troubled assets. ‘Ireland is showing signs of economic recovery and looks like it is eventually coming out of what has been a very difficult period. It is clear that the bottom has been experienced and there is a willingness to put these troubled assets behind them and move on.’

TPG started looking at real estate in earnest at the start of the financial crisis. Davis: ‘The firm has a lot of history with an industry-specific focus. In 2008, in the midst of the global financial crisis, we realised that this deep cycle of dislocation in the real estate sector was likely to present very interesting investment opportunities. We took it upon ourselves in 2009 to dedicate resources to take advantage of very attractive investment destinations both in the US and in Western Europe.’

In 2009, the company completed fundraising for a $19 bn investment fund, TPG VI, and shortly thereafter started investing in the US. ‘We were fascinated by the opportunities presented by the housing market collapse, and in the US we had a strong conviction that there would be a revival in prices by 2011.’

Focus on Europe
Davis said the group set its sights on Europe only recently, encouraged by the extent of the financial distress in evidence across the Continent. ‘Our interest in Europe has not been predicated on our ability to foresee broad-based economic recovery but on our ability to understand distressed capital structures. There are ways to get control of assets by bringing liquidity to specific situations. Also, we are intrigued by what is happening to values in some European countries,’ he noted.
TPG has used its financial acumen in the workout of two troubled Commercial Mortgage-Back Securities (CMBS) in Europe to date. In 2011 the company partnered with Patron, another private equity firm, to purchase the Dutch Uni-Invest portfolio, currently known as Merin. The portfolio was backed by the Opera Finance (Uni-Invest), reportedly the first CMBS in Europe to default on maturity.

Woolgate Exchange
In January this year TPG teamed up with Ivanhoé Cambridge, a real estate subsidiary of institutional fund manager Caisse de dépôt et placement du Québec, to take full ownership of Woolgate Exchange in London. The joint venture paid £265 mln, £5 mln less than the price Malaysian sovereign wealth fund Permodalan Nasional Berhad (PNB) was poised to pay for the 33,000 m2 trophy asset in April 2012. At the last minute PNB walked away from the acquisition which would have reflected a net initial yield of 5.5%. Woolgate Exchange is situated in the heart of the City of London, close to the Bank of England. The property is currently 100% leased on a long-term basis to Portigon, with sub-tenants including Investec Asset Management, Sidley Austin and the University of Chicago. TPG said the property was acquired through a complex and innovative financial structure.

Woolgate Exchange was acquired by Irish investor D2 Private for £325 mln in 2006. Anglo Irish Bank provided the financing and Credit Suisse went on to acquire the senior tranche. The asset, part of the commercial mortgage backed security (CMBS) known as Cornerstone Titan 2006-1, was put up for sale when D2 was unable to repay its loan in 2011.
Last year, TPG entered into an agreement to acquire the junior loan from the Irish Banking Resolution Corporation. By working with the senior and junior creditors the partnership was subsequently able to acquire the asset in a proprietary transaction.

Previously, the asset was held in a defaulted capital structure. ‘Our ability to manage a B-note that was held by an unnatural owner who wanted to divest the security gave us the opportunity to find a solution to what had proven to be a complex challenge until then,’ said Davis. The purchase will partly repay the junior loan secured against the building, while fully repaying senior bondholders. ‘This transaction again highlights our ability to source and execute quality property investments through complex CMBS restructurings. We believe there will be a number of other similar opportunities throughout Europe in the years ahead,’ said Davis.