When an opportunity presented itself to look at Private Equity (PE) in the region, and what the impact on the sector is from dealing with the Coronavirus pandemic, and lockdowns, we took it.
We spoke with Omar Jackson, Partner at Berkeley Assets ME HQ, an entrepreneur with remarkable flair for the business. Berkeley is over a decade old multi-asset company with a strong, diversified portfolio of investments across the real estate, hospitality, logistics and technologies sectors.
The interview is below.
1- General State of PE firms amidst the coronavirus- what’s the mood like?
The general mood of PE firms is one of understandable shock at the devastating effect Covid-19 has had on the world’s economy. PE companies are doing well and I’m fairly optimistic, but I know other firms in investment management are having a tougher time, due to exposure to market risk. As with any business there will be a risk mitigation strategy, but you can’t plan for an emergency on this scale. The general frame of mind is ‘plan for the worst and hope for the best,’ so we must go day-by-day and hour-by-hour, and handle the situation as it unfolds.
A recession was expected (although not in the form of Covid-19) and for Berkeley Assets and other PE firms, there is a sense of impending, but cautious opportunity, as there will be discounted assets available to purchase. Of course, the volume will be dependent on a certain amount of liquidity having remained throughout this difficult period.
2- Are PE firms raising cash for new equity investments? What sectors are of interest?
In private equity the aim is simple – raise capital and invest it. The complexity of firms has changed with the rise of mega funds and niche houses, but ultimately it can be distilled into those two key business fundamentals. The big firms will currently struggle to raise new commitments depending on the stage they are at, however, the final closing of Blackstone’s long-anticipated sixth European opportunity fund was announced recently at €9.8 billion. Blackstone Real Estate Partners Europe VI was the biggest property vehicle raised in 2020, and the largest-ever in Europe, but I expect they will delay the investment period for around six months.
There is an underlying issue that will face a lot of funds in the next six months when it comes to calling capital from existing Limited Partners (LPs). When raising capital, the first thing to happen is commitments from your LPs, then you draw on them over the investment period of the fund. Similar to 2008, I imagine a lot of LPs will be calling General Partners (GPs) asking them to hold as liquidity tightens across the globe. Ultimately, GPs want to maintain their relationships with LPs, so each firm will take an individual view on this.
Although there is a cautious mood, sectors of interest in terms of increased allocation will be opportunistic and distressed buyout funds (specific to real estate in general) as well as healthcare funds.
3- Are financial sponsors anxious?
Yes, most firms are worried about credit lines being cut and a lack of liquidity due to LPs defaulting on calls. Any intended listings for IPOs right now couldn’t have come at a worse time with the global markets in turbulence. However, most PE firms with experienced leaders will be able to manage the situation, as half the battle is managing their LPs expectations, but given the state of play right now, LPs will have managed their own expectations. If GPs have been trusted so far, there should be no reason to doubt them in times like this.For us, making sure our clients are well informed each week is vital.
4- Are equity investments in real estate a reason for concern in the region? (market over supplied, EXPO 2020 delays, low prices, Corona impact, recession looming globally).
There has been a quick and detailed review at operational and capital levels for the private real estate sector. I wouldn’t like to predict the recovery for any economy right now, and truthfully no one knows accurately as Covid-19 is still a global pandemic, but looking at JP Morgan and Goldman’s recent predictions for revised S&P earnings to zero, it doesn’t fill me with much hope. This isn’t a geographical problem, it’s a global supply chain and revenue issue so all real estate will be affected, not just in Dubai. Real estate typically lags behind by six months, so we are yet to see the worst, but that doesn’t mean buying opportunities won’t be presented for long term holds.Dubai has some great opportunities, but as with all real estate projects across the globe, choosing the right development is key.The major issue in this region is the significant over supply and concern over projects that are now struggling to complete, and even those that do will have issues selling units which will lead to a substantial amount of post-handover offers.
5- What ROIs are available for sponsors now and by end 2020?
It’s difficult to say right now, but generally yields will be down, exits will be affected, calls on capital will be defaulted on, and GPs will delay calls on LPs. A lot of firms will delay their exits until more stable times in around 12-18 months, but LPs will be expecting this and will realise that locking an exit in now would be short sighted. A global “black swan” event like this does have one thing on its side – everyone is in the same situation. GPs will have their work cut out for them to manage and steer through these risky volatile times, but ultimately that’s what we are here for.
6-How do PE firms navigate the current conditions in order to:
1: Appease investors
Managing expectations is crucial and increased regular updates to LPs will be needed as well as a lot of transparency on capital call timelines. Some of them may choose to defer management fees for now or decrease the frequency of the charge date. No LPs are going to reasonably expect to have a smooth sail for the rest of the year, so GPs are going to have to provide reassurance that they have their finger on the pulse in order to weather the storm.
2: Create value in company assets where funds are invested
Firms will be recapitalising debt for cheaper financing costs, but there will be cost cutting across the board, so portfolio companies will be a go-to. Factoring in longer hold times as exits become delayed will be key for extension of financing costs, so it will be key to look at debt covenants.
3: Collect management fees/profit sharing on time even as investor finances are stressed
I imagine that management fees may be deferred as an act of goodwill, as well as decreased frequency of collection. LPs understand that they are sharing in the investment risk when they enter PE firms and are happy to pay the management fees – that is ultimately the cost of having your capital there. Capital calls will be more on the LPs minds, rather than management fees. Ultimately GPs have the responsibility of steering the investments vs. managing LPs relationships on capital calls. It’s a delicate trade off that will have to be balanced in current times.
7- What analyses or indicators can you mention that can provide an economic outlook to build an investment appetite upon?
Berkeley Assets as a PERE (private equity real estate) firm, will be looking at a lot of criteria. For us the following investment indicators are key; interest base rates, peer to peer marking on ROI across PERE competitors, turnover/liquidity in the real estate market and default rate on commercial and residential tenants. To understand the general picture, we are of course looking at; lockdown removal dates per geographical region, death rates, recovery rates of virus and date peaks of cases in countries.
8- How is the portfolio of Berkeley PE assets doing? Plans?
Across the board we are reducing costs as we much as we can and are looking for better financing deals over the next six months, as well as reviewing existing debt covenants. Post Covid-19 there will be opportunities. There will be a ‘sale’ in the world of real estate, so we will be able to go and purchase commercial and residential, large and small projects which have been discounted and are under market value. Logically, when there is a recession, the real estate markets are hit. People can’t afford to pay their rents, they have lost their jobs, they can’t afford to pay their mortgages which means the institutions, mortgage issuers, banks and landlords will enter the market and repossess. The result of this is that PE firms like us, alongside other similar institutions will be able to purchase valuable and profitable real estate, assets and “projects” at a substantially discounted rate. We will of course maintain our ethical approach to asset selection, which will now more than ever, prove of vital importance
In addition, due to the continuing devaluation of GBP because of Brexit and Covid-19, we can benefit as we raise the majority of capital in USD and therefore, we will make significant gains on the currency conversion. Due the liquidity we hold, we’re able to operate efficiently with no staff losses and a strong business strategy so clients can feel safe with us.
Additional information – the Berkeley Assets viewpoint in the bailout of PE firms
Governments in places like the UK are rolling out state backed emergency packages as lifelines, to squeezed medium sized enterprises called the Corona business interruption loan scheme (CBILS). This is for businesses with turnover 45-500M GBP. Typically hospitality and retail have been hit the hardest, so I imagine they will most likely take governments up on this offer. PE firms are worried that the businesses they own will be ineligible for CBILS as the government will view these businesses in aggregate and take into account the value of the entire PE firm
There is a lot of stigma attached to PE firms taking government bailout. If you are a tier one PE firm and you apply for a loan it can come across negatively and there may be trouble down the line if PE firms are seen to be profiting from these bailouts in times of trouble. There is a lot of dry powder (capital committed by LPs, but not spent yet), but that shouldn’t be a factor when considering if PE backed businesses are eligible to the CBILS.