Internos Global Investors has swum against the tide in the past five years and is now ready for the next phase in its evolution.
Internos Global Investors has swum against the tide in the past five years and is now ready for the next phase in its evolution.
In early 2008, Andrew Thornton and Jos Short set up Internos Global Investors, a new real estate business based on the traditional private equity model. The aim of their partnership was to back real estate opportunities across the risk spectrum with a small team of bright and experienced people, Thornton recalls in an interview with PropertyEU. ‘All of that was going swimmingly until Lehman hit. Rather naively, we thought we could raise capital for our plans, but it took awhile before we got investors’ trust. The feedback we got was: “We wish them well, but we’ll see how it goes before we make
a commitment”.’
Needless to say, Thornton and Short’s fledgling company has not been one of the major fund-raising machines since the outbreak of the global financial crisis, but the pair quickly found another lane to swim in. At end-2009, the London-based company led the acquisition from the Sydney-based GPT Group of the Halverton real estate investment management business for the nominal sum of €2. In one fell swoop, Internos obtained €1.7 bn of gross assets under management in five funds and two separate
account mandates in Germany and the Netherlands.
The deal also provided a pan-European platform with offices in London, Amsterdam, Berlin, Frankfurt and Luxembourg and a team of around 100 people. Since then, Internos has gone on to build a platform spanning 1,000 properties across Europe, a team of 110 and assets under management valued at €4.1 bn.
Thornton describes the post-crisis environment Internos found itself in as ‘a very surreal place’. ‘It was both a nice place and a worrying place to be. The entire landscape had turned upside down, but our company was without any legacy issues. That meant we were able to think more creatively than most. We had a huge desire to grow our platform in a sizeable way and we have been able to tap into a rich seam of management replacements. We now have a reputation for takeovers and turnarounds.’
Internos was not the only investor looking at Halverton, but once the deal was struck, it found itself on a firmer footing, Thornton adds. ‘Halverton gave us a platform, people on the ground and assets and an ability to tell a story. It put us on the map and gave us some institutional relationships.’
Following the Halverton deal, Internos went on to stabilise and rationalise the operations comprising mainly office and light industrial assets in the Netherlands and Germany, and multi-let office properties outside the central business districts of Germany’s five major cities. Two years later, Internos again challenged its larger peers for control of the Luxembourg-registered Invista European Real Estate Trust SICAF (IERET). While Internos’ takeover bid for Invista’s publicly listed unit and its self-storage business in Asia was scuppered, the IERET deal broadened the platform and gave it access to strong teams in France. The Halverton and Invista deals helped establish Internos’ reputation as a pan-European real estate asset manager, but its successful bid for a KAG licence from Germany’s financial supervisory body BaFin put it in a different league. A KAG licence enables fund managers to set up and operate German Spezialfonds (special funds) for institutional investors which are widely viewed as the preferred vehicle for German institutional investment in real estate. Only a small group of international property fund managers have KAG units in Germany: other members of the club include significantly larger players such as Aberdeen Asset Management, La Salle Investment Management, Warburg-Henderson,
Pramerica, Schroders and Morgan Stanley.
STRATEGIC LEAP FORWARD
That move was a strategic leap for Internos, Thornton says. ‘You could argue that a Luxembourg vehicle works just as well and is just as efficient. But for a German investor, a Luxembourg vehicle is not a KAG. Luxembourg vehicles typically accommodate a range of demands while KAGs are highly regulated vehicles. They only work for German investors: they provide a degree of comfort because the investors are all like-minded.’ A key issue for a fund manager is to understand clients’ needs, he adds. ‘There’s no point saying a Luxembourg vehicle is the answer. Sometimes it is, but sometimes it’s not.’ Hard on the heels of the KAG licence, Internos announced another coup: the acquisition of Commerz Real’s real estate Spezialfonds business (CRS) in June 2013. ‘We just had one KAG, and then another comes
along! It was a bit like the London buses,’ he jokes. The deal, which Thornton describes as ‘quite audacious’ as well as ‘a defining moment for Internos’, adds on 68 assets valued at €1.6 bn, mostly logistics and office buildings situated in France and Germany. The transaction does a number of things, he says. ‘It really balances our business: we are now as much a German business as we are a UK business or a French business. It gives us access to over 40 very strong institutional relationships in
Germany, particularly with pension funds but also with insurance companies.’
More recently, Internos received a mandate from UK REIT British Land to provide advisory and asset management services to the Pillar Retail Europark Fund (PREF). The British Land deal is the eighth fund manager replacement mandate for Internos since its formation in 2008. Over the past six months, it has also been appointed investment manager of Local Shopping REIT. Other recent mandates include one to manage a French portfolio for a Swedish pension fund and another, from the Saxony Doctors Pension Fund in Germany (Sächsische Aerzteversorgung ‘SAEV’), to invest up to €200 mln in value-add European hotel real estate.
The company’s inaugural hotel fund has performed so well that Internos now plans to launch a successor. ‘We have done things back to front,’ Thornton laughs. ‘We had hoped to raise equity for an opportunity fund, but built an asset management platform instead.’
It has been a lot of work to get the building blocks in place and make sure everything is integrated in a consistent way, he adds. ‘There is more than one right answer. We are learning from the teams that have come in what Internos the best practices are. We want a corporate culture that accommodates differences. Respect differences, that’s where opportunity comes from. Some things are fundamentally
the same, for example what occupiers and investors need, but our experience is that Europe is a very
different marketplace. We aim to be a quality fund manager for investors in Europe. We’re a little bit different and a little bit more alert to the differences.’
Raising and deploying capital
The next phase in Internos’ evolution is all about fund management, Thornton predicts. ‘We want to be known for our investment acumen and skill set, our ability to access the best opportunities and deploy capital in them. That is key and at the heart of everything.’ He does not seem fazed at all by his company’s lack of track record: ‘We have a much more balanced business than many of our competitors. Many of our peers are London-, Parisor Frankfurt-centric but our team has experience raising money from local investors, devising fund products and deploying capital across Europe. We also have a stronger back office and fund administration in house. We believe that unless you have the granular data, you can’t manage property properly. Some players outsource the accounting
and argue that it allows them not to be distracted. But I would question whether it gives you the tools to access all the information. If you want your forecasts to deliver, you need to manage the cash right and think it through. That is not specific to a country or a sector and you can’t do it unless you have the whole picture.’
Thornton describes Internos as being ‘agnostic’ to structure and jurisdiction. ‘The way we deploy capital is also agnostic. It may be through dedicated funds or a dozen separate accounts. We try to be flexible and match the best capital with the best deals.’ Being agnostic means being able to listen to what investors really want, he continues. ‘There’s a danger in being a niche player. There are times in the cycle when you will really be in demand and other times that you are not. It is absolutely essential
to play across the risk spectrum, deploy wisely in those markets where you have a conviction and have access to different pools of capital.’ While a new hotel fund is now in the offing, more products are also on the way. ‘There’s a lot of noise now about our hotel funds, but we’re a much broader business and have a mix of assets. The depth of the business we have around Europe is reflected in the strength of our middle and back offices.’
One fund for everyone doesn’t work, he adds. ‘Hotels are a specialist product for a defined group of investors who want income return and capital preservation. Clearly there is potential where there is a specialist story such as in the hotel space. We have the expertise and knowledge to deliver better income returns than in other asset classes.’ The healthcare market and senior living also offer potential, he adds. ‘I have a fundamental belief in these segments. A fund manager has to have a view of the world, about where to invest and why. Having a good strategy means nothing if you can’t deliver it. access to the market is all that is really important.’
While core has been ‘king’ since the outbreak of the global financial crisis, appetite for risk is resurfacing. Thornton says he ‘loves’ the idea of opportunistic investment. ‘A lot more is out there. Historically the property sector has needed growth and debt, but we’re now starting to see some growth coming through and more creativity on the funding side.’ Internos has many of the building blocks now in place for the next phase in its evolution, but the company is by no means a finished product, Thornton says. ‘No fund manager in Europe is right now. What I enjoy is the journey and what we’re creating. I’m
enjoying the moment. We’ve punched above our weight and I’m proud and pleased about what we have achieved. We have collected the vital ingredients of what we need, but the future excites me now more. You have to have a fundamental passion and belief if you want to identify or go for opportunities. We have an ability to react to them and define them.’
Judi Seebus