Keynote Interview: ICG-Longbow

A consistent and reliable lender within its UK mid-market sweet spot is a reputation ICG-Longbow has earned over the past five years, essentially by following through on what it says it is going to do.

As at December 2015, ICG-Longbow’s 29 strong team managed £2.4 billion ($3.4 billion; €3 billion) of investor capital. Its chance now is to capitalise on the continuing opportunity for non-bank lenders by raising further funds across its existing proven strategies, whilst also exploring the potential for the launch of new complementary strategies.

“What we’ve built is a specialist investment management team that has strong support from its investors and borrowers thanks to our track record of delivering – both for investors in terms of deploying raised capital in line with the relevant strategy and for borrowers by providing the financing we say we are going to in a timely and creative manner,” says Martin Wheeler, co-head of ICG-Longbow.

He jointly leads the real estate debt business alongside Kevin Cooper, who between them formed the company originally as Longbow Real Estate Capital through the purchase of a portfolio of UK commercial mortgages from their previous employer, GMAC, ten years ago.

In 2010, global credit specialist Intermediate Capital Group (ICG) bought a controlling interest in Longbow to grow its assets under management and expand into real estate, prompting the name change.

“Number one for us was ICG’s fantastic reputation with institutional investors in its core private debt and equity strategies. That helped us in the early days to raise capital for our Fund II which closed at a hard cap of £250 million in 2011,” says Wheeler.

Now wholly owned by ICG, the business has benefited from synergies brought about by working for a larger organisation, including access to ICG’s infrastructure – from HR, compliance and finance to marketing of new funds.

“ICG has been very supportive in enabling our growth but leaves the real estate experts within our team to make the investment decisions and define the strategies,” Wheeler shares.

Key to ICG-Longbow’s strength are the relationships formed over the decades by its 12-strong senior management team, based in London, Yorkshire and Glasgow with 24 years’ average experience. This provides it access to some of the best deals from highly experienced UK property companies across different sectors and regions.

Embedded local property market and asset management knowledge also allows it to underwrite more complex property or business plans or do deals other lenders might not, typically for proposals where it can see materially less risk over the medium term.

“When you’re able to really peel away what’s going on and get back to core property fundamentals, often it’s possible to offer a financing solution that works well for a borrower, without an increased risk profile,” Wheeler says. 

Clients are called ‘property company partners’ in ICG-Longbow’s vocabulary. The notion of its being a partner to borrowers rather than simply a financier reflects the fact “we speak their language and look for solutions that work for both sides”.

It looks at deals from the bricks and mortar up, starting with likely tenant demand for a building. This was the rationale behind its whole loan financing of Goresbrook Park, what was a vacant industrial park in a key distribution hub in Dagenham that the buyers intended to refurbish.

“We saw that as a great transaction owing to the entry price and an underlying asset that met what a modern occupier seeks from distribution property in terms of location and specification, in a supply constrained market place with strong potential tenant demand,” explains Wheeler.

“Our approach was ‘yes it’s an 85 percent LTV (loan-to-value) on an empty asset but our key metric was the £36 per square foot capital exposure, which is less than it costs to build and so was compelling for a prime distribution asset in Greater London with the prospect of leasing up rapidly’.”

In the 12 months that followed the £22 million purchase a tenant was secured and the asset was resold for £51 million, providing 50 percent in gross IRR and a 1.5x investment multiple to the fund.

The manager operates three different risk/return strategies: whole loan and mezzanine funds II, III and IV; a senior debt programme including a listed senior debt fund; and a residential development partnership.

Across all three it lent just over £1 billion last year in 42 predominantly regional transactions (with an allocation to London and the South East in each fund) averaging £24 million.

“That’s what we’re set up to cover and where we see best value because there are often more interesting transactions under the radar of bigger funds where we identify both lower risk and more attractive returns across all of our strategies,” says Wheeler. Its longest-established strategy is providing whole loans and mezzanine debt, including some capital for development finance. Through its flagship funds, ICG-Longbow has invested over £1.4 billion in more than 50 higher loan-to-value transactions secured on value-add properties, which are predominantly whole loans which it retains on the funds’ balance sheets for maximum control.

“You get a blend of a defensive piece in the capital structure through a first charge mortgage on a property, with higher returns that can be generated by providing a higher LTV. We see this as being an opportunity that is more available in the mid-market than the large ticket market, where borrowers seek to reduce their overall cost of capital,” notes Wheeler.

Its latest fund (Fund IV), which has a target fund size of £750 million, had raised £680 million as at December 2015, according to ICG’s January trading statement

A major source of deals, particularly for Funds III and IV, has been helping borrowers buy back property or debt following commercial real estate loan book sales.

Says Wheeler: “If you think that circa £25 billion of loans were sold in 2014 with an average ticket size of £20 million that’s right in our target market place. The opportunity to add value is there because these properties have been starved of capital for the last eight years or so which provides the ability to recapitalise the borrower vehicle and property and to realise the business plan.”

ICG-Longbow is candid about what’s possible in today’s environment and what investors can expect across all its funds – a trait evolved from compliance with public market requirements.

Returns across its whole loan funds have come down since 2010 but 80 percent-plus LTV first mortgage lending in the part of the market the company targets means it can still deliver investors a double digit return profile with a strong income component of 7-8 percent net.

At the other end of the spectrum is ICG-Longbow’s senior debt strategy which was launched in 2013 through the IPO of its £108 million listed fund. This “has done what it set out to do which is to produce a 6p per share annual dividend with a maximum 65 percent LTV exposure”, says Wheeler, although he acknowledges that it is not possible to recreate this in today’s market.

The listed fund was followed by ICG-Longbow’s Senior Debt Programme, which is today run by David Mortimer and has grown to over £750 million, with the bulk of capital coming from private co-investment mandates from UK pension funds.

“Our senior debt programme is set up to be very defensive, offering an alternative to investment grade corporate bonds with the objective of giving institutional investors access to higher returns without taking on a materially higher risk profile,” Wheeler says. The senior debt programme is again focused on the mid-market with a maximum LTV ratio of 65 percent and seeks to reduce risk by lending on a bilateral basis, whilst targeting opportunities underpinned by high tenant diversity.

It is understood that capital-raising for this strategy is an ongoing process.

The final piece of the jigsaw is ICG-Longbow’s reported £202 million development partnership with Abu Dhabi Investment Authority, which provides capital to fund predominantly residential development nationally with a focus on outer London and the south of England.

The firm declined to publicly discuss the mandate or confirm what investor it is with.

On the rationale for residential development though, Wheeler is more forthcoming. “The macro situation is such that there are not enough homes and there is concern that the wrong homes are getting built, especially in central London. Our focus is on developing homes that are affordable for local owner occupier purchasers, where there is strong demand,” says Wheeler.

To date, developments have been financed in Brighton, Southampton, Bristol and Bath.

Despite volatility in the market, real estate debt investing “still makes a huge amount of sense” whether compared against direct property investment or a corporate bond alternative.

Wheeler explains the reason being is that “we see the overall UK commercial property market as fairly valued against alternative asset classes. Undoubtedly there are some hotspots but if you look through capital markets volatility there remains strong tenant demand as a result of job creation over the last few years coupled with low levels of new supply since the financial crisis which has meant underlying commercial property has seen vacancy rates reduce and income grow”.

As one of the longest established teams in the UK real estate debt space, there’s reason to put faith in ICG-Longbow’s logic.

With the union between Longbow and ICG cemented over the past five years, the two sides of the business have been “working together to define what the future looks like”, says Wheeler. A potential option is the expansion of ICG-Longbow’s footprint on the continent.

“ICG is a global investor whose flagship funds are pan-European so it has always made strategic sense for the real estate business to be wider than just the UK. There’s no significant hurry but it’s an area we are looking into,” he says.

First on the company’s agenda, however, is bringing in more capital for its existing strategies which continue its “risk averse, property-centric investment philosophy”.

This article is sponsored by ICG-Longbow. It appeared in the April 2016 issue of Private Debt Investor.