EUROZONE: IPO, the easy way

Managing a private fund has gotten so tricky that one UK property company has gone public to avoid the headaches of dealing with LPs. PERE June 2009

In March, David Gillerman, the European real estate head of New York hedge fund Och-Ziff Capital Management, attended the MIPIM property show in Cannes to attend an important meeting.

Robin Marriott

In town to speak with Gillerman were Nick Leslau, the chairman of London property company Prestbury Investment Holdings, and his advisors from Morgan Stanley. The topic of the day was not the weather, food or attractions in the south of France, but a breakthrough capital markets event. As the companies made public only last month, Och-Ziff will back the London IPO of Prestbury's Max Property Group.

The listing will allow Leslau's highly-regarded Prestbury team to raise capital in anticipation of what most people consider will be a glorious period to acquire UK real estate. But it also signals how much the market has changed.

Prestbury's having no assets to put into a fund is regarded as a strength of the offering. Leslau and team do not have to get bogged down with tricky valuations at a time when there is hardly any transactional evidence.

Leslau and Morgan Stanley have concluded that from fundraising and governance perspectives, it is more burdensome now to raise and manage a private fund. Better run a public company, they reason.

Do you feel the need to read that again? Such are the demands limited partners place on their GPs nowadays, even taking into account the regulatory framework of a listing, there is probably less governance and associated issues involved with making key investment decisions in a public company than there are in putting equity to work in a private equity real estate fund or club deal structure.

From fundraising and governance perspectives, it is more burdensome now to raise and manage a private fund. [It's] better to run a public company.

Leslau prefers discretionary investing and he is unused to reporting on issues beyond those necessary under stock exchange rules. The last thing he wants is a cumbersome decision-making process.

The investors in the free float are thought to be UK institutional investors, not sovereign wealth funds and fast-moving hedge funds. “Sticky” institutions are exactly the type you want in your IPO.

Of course, Och-Ziff is a hedge fund, but not the quick-trading or nearly extinct kind. If you study the group's background, you will find it managed 8 percent growth even when the tech bubble burst at the turn of the decade.

As Daniel Och said recently in a presentation, it is quite diversified in terms of long-short exposure, credit and private investments and traditionally it has never believed in significant leverage or in large single directional bets. It is also hot on disclosure and risk management.

And though it got hurt in the last quarter of 2008 with heavy redemptions, it is seeing redemption levels ease now. It wants to expand product type and geographies and generally expand assets under management. Most importantly, it wants to take advantage of “dislocations” in the market, hence its participation in Max Property.

Och-Ziff is a cornerstone investor, committing around £35 million to the new company, while the management team and affiliates have put in around £25 million of their own money. Och-Ziff will, of course, earn fees along with the management company, and will earn a share of the promote. (The fees are de minimis once you remove the costs of running the vehicle and they only get 22.5 percent of the surplus).

So Leslau has found a hedge fund partner willing and able to get involved at a time when most people assume hedge funds are shot. At press time they were on track to go public on 27 May, hoping to raise up to £200 million (€227 million; $309 million).

Once they've gone public, the task will be to go out and buy assets in order to make the story work. The UK property industry will watch with interest, but for now we should focus on the issues that the IPO itself highlights beyond confirming that many institutions feel today is a great time to be buying.