November 23, 2012 7:09 pm

Buyout groups pick up Irish bargains

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Almost two years since Ireland was forced to accept an international bailout to prop up its ailing banks, private equity groups are seeking out bargains amid hopes the country’s economy has stabilised.

This week Apollo Global Management, Kennedy Wilson and Blackstone invested almost €400m acquiring distressed loans and commercial properties in Ireland at a fraction of their face value. Several other private equity groups including Oaktree Capital Management, Lone Star, Carlyle Group and KKR are also eyeing €50bn in non-core assets, which are targeted for sale as banks shrink their balance sheets.

“There are signs of life returning to the Irish merger and acquisition market and that is largely driven by a lot of international private equity interest,” says Michael Neary, head of corporate finance at Grant Thornton.

Grant Thornton, which held a private equity seminar in Dublin that attracted 200 industry operators this week, has been involved in several restructuring-style private equity deals in recent months, including Blackstone’s acquisition of the Burlington hotel in Dublin. The company says about €10bn worth of deals have been done this year, a notable increase in comparison with the same period in 2011, as banks finally begin to shed non-core assets.

“It is no surprise that it took a bit of time for financial institutions to address their liquidity and capital issues,” says David Abrams, managing partner for Apollo’s European Principal Finance Fund.

“Given the role that governments and regulators have played in the banking sector since 2007, the first priority was to stabilise the banking system, and then subsequently to create a plan to reduce the size of the banks’ balance sheets by selling off non-performing and non-core assets,” he says.

Positive shift in investor confidence

Rising sales in the Irish commercial property market signals a positive shift in investor confidence, writes Anna Devine.

Total returns in the Irish investment market are up 4.8 per cent in the last 12 months, according to the IPD’s Irish property index.

Purchase gains, both domestically and from overseas, for the first nine months of 2012, amount to €271m in commercial investments, an increase of 40 per cent since 2011, according to real estate services company CBRE’s bimonthly report.

Offerings are also up with more than €700m of investment property being formally marketed for sale or under offer.

The main reason for the upturn in performance is the “positive outlook for the Irish economy in the medium term,” says Caroline McCarthy, executive director for Ireland at capital markets CBRE.

“Investor demand has been strong – there just wasn’t the opportunity for them to buy.” The company has seen a pick-up in activity since the mid point of this year.

Demand for prime office property, on the basis of future rental growth projections, is robust. Investors are also focused on securing prime retail and residential portfolio investments, particularly in Dublin, according to the CBRE report.

Apollo is paying £149m to buy a portfolio of distressed commercial property loans in Ireland from Lloyds Banking Group with a face value of £1.46bn.

This was the US group’s second big investment in the country in a matter of months after its purchase of Bank of America’s MBNA Irish credit card consumer business in March.

Apollo, like many of the big private equity groups eyeing Dublin, has hired local advisers such as Brian Goggin, the former chief executive of Bank of Ireland, and is building up local servicing companies to help it work through the distressed loan assets it is buying at steep discounts.

Kennedy Wilson, which so far is the biggest private equity investor in Irish assets, is one of several groups that invested €1.1bn last year to rescue Bank of Ireland from state control in mid-2011. It also bought the bank’s real estate investment management business, as part of a rapid expansion of its European operations.

“These deals enabled Kennedy Wilson to get under the bonnet at the bank and helped it to cherry pick some of the best assets,” says one Dublin banker, who did not want to be named.

Until now the main Irish banks and Ireland’s National Asset Management Agency, the so-called bad bank set up to strip toxic loans from lenders, have focused on shedding foreign loan books rather than selling off Irish assets at steep discounts. However, in recent months Lloyds, which owns Bank of Scotland Ireland, has begun aggressively selling off its £16.1bn distressed Irish loan book as it prepares to exit the Irish market. Allied Irish Banks, Ireland’s second-biggest bank by assets, is now also a seller.

Last month Lone Star, the Texas-based private equity group, bought a €660m portfolio of AIB loans at a discount of about 60 per cent. And in a positive signal for the cash-starved Irish marketplace Nomura agreed to provide €200m debt financing on the deal, according to a banker with knowledge of the deal.

“One of the big changes in the last few months in Ireland is that debt financing has become available to enable more private equity deals by matching the book value of assets to the price expectations of purchasers. There are now several international banks willing to finance deals in Ireland, including Bank of America, Deutsche Bank and Nomura ” says another person with knowledge of the AIB deal.

Ireland’s adherence to its European Union and International Monetary Fund programme, its return to economic growth last year and continuing political stability are also easing investor fears.

“For us everything started from a macro view when it came to Ireland,” says Wilbur Ross, a billionaire investor who was part of a consortium of North American private equity investors who paid €1.1bn last year for a 35 per cent stake in Bank of Ireland.

“Ireland is a high-tech economy, with non cyclical exports, good infrastructure, a young workforce and Irish people understand they have to get through this tough period. I have great confidence it will be the first of the peripheral economies to recover,” says Mr Ross.

Commercial property prices are stabilising following falls of more than 65 per cent from their peak in 2007.

“Investors are encouraged by Ireland’s improving economic prospects and the very attractive yields, which are 7 per cent for Dublin office and 6 per cent for retail property,” says Marie Hunt, CBRE head of research. “New private equity money is also coming into the market that is not reliant on bank debt,” she says.

Private equity groups are also targeting growth opportunities in Ireland as well as distressed assets. Carlyle recently held talks with Ireland’s state pension fund about co-investing in Irish export focused businesses. And in August Exponent Capital, a UK group, fought off six rival private equity bidders to buy the Galway-based financial services company Fintrax for €170m in August.

“With the main Irish banks and Nama set to put more assets on the market as they shrink their balance sheets, the economy improving and more debt finance available, there is a very bright future for private equity investment in Ireland,” says Cathal Friel, founder of Raglan Capital, an Irish company which advised on the sale of Fintrax.

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