Tristan Capital Partners, the London-based private equity real estate business founded by chairman Ric Lewis in 2009, has a history of buying properties and adding value to them. Since its launch, the firm has poured around €20 billion into European real estate through 10 distinct value-add vehicles across two fund series.
Today, Tristan manages around €12 billion of client assets and is currently focused on running its two main equity strategies: the European Property Investors Special Opportunities 5 fund, an opportunistic vehicle that closed on €1.7 billion in February 2019 and which has around 25 percent of its capital left uncalled; and the open-end Curzon Capital Partners 5, a core-plus fund for which the manager raised €600 million during the early part of 2020, taking its size to €2.2 billion.
While continuing to raise capital for its equity strategies during the pandemic, the firm was also quietly planning its European lending debut. Tristan is aiming to raise up to €1 billion initially, which it will deploy through whole loans with loan-to-value ratios of up to 75 percent in the mid-market against transitional real estate.
In February, the firm hired Dan Pottorff, a real estate finance specialist who previously originated loans for property manager LaSalle Investment Management. Prior to that, Pottorff had held roles in structured finance and distressed credit investing for organisations including US bank Morgan Stanley and investment manager Strategic Value Partners.
Speaking to affiliate title Real Estate Capital in Tristan’s head office in London’s Mayfair, Pottorff explains why the new challenge appealed to him. “First, the brand,” he says. “To set up a lending business in Europe is extremely relationship-driven, so you need to join a firm with an established reputation.”
The scope to build that business out across the European markets in which Tristan was already active was another attraction. “When I began as a debt fund lender in 2014, it was a UK-centric
industry and that has gradually changed. Since joining Tristan, I have spoken with a few borrowers based in some of the main continental European cities who admit that, before covid, they would not have considered talking to a debt fund. They had established relationships with banks and the cost of capital they used to offer was more attractive for them. But covid cut that.
“There was a switch that flipped with covid where many continental European borrowers felt they needed to start talking to debt funds. Even if debt costs them a bit more, they feel they can better implement their business plan and, along the way, add value to their properties.”
Pottorff is joined in the discussion by Ian Laming, Tristan’s chief executive. According to Laming, the new strategy was designed with “like-minded sponsors” in mind. These sponsors need finance for the type of non-core and value-add projects that Tristan has traditionally focused on with its equity business, plus in the preceding years when the firm’s executives invested together as Curzon Global Partners.
“We will be underwriting the kind of deals that we have done for 20 years – smart people finding assets with correctible impairments, using sensible leverage to make their assets more valuable over time,” says Laming.
He argues that there are relatively few lenders in the market with direct experience of doing such deals: “We understand transitional business plans and that cashflows can be variable. We understand the alternative real estate sectors that are coming through.”
Pottorff adds: “Some of these sponsors cannot wait for finance. I can think of a couple of deals in our pipeline where the sponsor needs to close in six weeks and, in places like Spain, Portugal, France, that is not going to happen with bank lenders. So, they need to work with companies like us.”
With Pottorff at the helm, the team also comprises Ashil Sodha, who joined from alternative lender Starz Real Estate to focus on loan origination; Owen Jones, who worked with Pottorff at LaSalle and will now be leading deal execution; and Cameron Gorniak, who has a background of working in Australian debt funds and will handle debt operations.
According to Pottorff, hiring people with debt fund backgrounds was intentional, because such experience would match the needs of the strategy’s target clients: “Everybody comes with some experience of this type of platform, so they understand the structural issues that come with being an alternative lender. That’s really powerful for us.”
Since news of Pottorff’s hiring spread in the market earlier this year, Tristan has been regularly namechecked by market sources as a prime example of the new wave of real estate market participants adding European debt to their repertoires. Speaking off the record, one debt fund lender said new entrants are a frequent occurrence in a relatively large market. However, they added that Tristan had made an astute hire with Pottorff: “Dan is an experienced and well-respected professional with a deep track record in the real estate structured finance universe.”
For now, Tristan will make its debt investments via a single strategy, through which it will target loans priced from around 300 basis points to 500bps. It is understood to be targeting a 6-7 percent return.
The firm has already secured a €150 million capital commitment from US investment management firm New York Life – which bought a 40 percent stake in Tristan in 2018 – and is in talks with existing investors that had previously expressed their interest in debt to help it reach its €1 billion target.
“Once travel restrictions start easing by the end of the summer, fundraising will kick off in earnest,” says Pottorff. “We are talking to people we know very well, but it takes time and the need to visit our clients.”
Pottorff says investors are getting more sophisticated when it comes to real estate debt. “Increasingly, you are seeing meetings where you have the fixed-income person and the real estate person from an institution, and they recognise that there is something of both in the product you are offering.”
Tristan, Pottorff insists, is committing to debt, rather than treating it as a cyclical opportunity: “This is a long-term project, set up to scale over time. How we scale it is going to be an interesting evolution over the next few years. We are starting with one strategy, and over time we will probably add higher- and lower-risk-profile strategies. But we need to go step by step.”
Pottorff and Laming are confident the debt strategy will grow to a similar scale to some of its more established lending market competitors. In addition to the strength of Tristan’s equity business, from which the debt business will source some of its opportunities, Pottorff says the mismatch between debt demand and available funding for value-add projects in Europe further boosts his confidence: “There are just a few established non-banking platforms operating in Europe, which creates a capacity issue. Only so many people can look at so many deals at one time.”
Non-bank organisations have been lending against European real estate for around a decade, which means Tristan is arguably a latecomer to the market. Laming explains that lending has been on the minds of the firm’s senior executives, driven by growing investor interest in credit. “We have been thinking about it for the past five years but have been so busy with our opportunistic and core-plus funds that we did not want to get distracted too early,” he says. “We have always thought that, before setting up any new business, everything needs to be thought through.”
The “real accelerant”, he says, was New York Life’s investment in Tristan: “New York Life is one of the largest real estate debt investors in the world, investing in the US. When we closed the deal, we knew they would be the perfect partner to invest in European debt.”
The ultimate driver, Laming says, is the firm’s investor clients. And he believes Tristan’s business was launched at the perfect time, as investor interest in defensive credit strategies is growing due to the uncertainty created by covid-19: “We invest in 20 countries across Europe, so to have a debt team work closely with the rest of the team and share their knowledge made perfect sense.”
Pottorff acknowledges that banks’ appetites for European real estate lending have reduced. However, he argues that the launch of Tristan’s strategy was not a direct response to this: “Although what European banks do has an impact on the credit space, we did not set up our strategy with that directly in mind. I would not say our aim was to fill the voids left by them.”
Laming agrees: “A lot of people talk about this being structural because of the capital costs in the commercial banks. I think that is true to a degree, but I think people miss the people side – the capacity to understand the sorts of deals that we will do with borrowers.”
Tristan is aiming to provide facilities ranging from €30 million to €100 million, a segment Pottorff describes as the “mid-market”.
He says the mid-market is the segment most underserved by lenders and where “there are more opportunities, less competition and more attractive pricing”.
Pottorff says one of the reasons for the particularly acute funding shortfall in this market segment is the perception among financiers that ‘smaller’ transactions, while requiring similar levels of time and internal resources to complete as larger deals, do not move the deployment needle: “There are fewer players eager to focus on that space because of the perception that, if they can go for bigger transactions, they prefer to do so.”
The lending strategy is relatively sector-agnostic. The key factors, Pottorff says, are that the property is subject to a convincing business plan and that it meets demand specific to its location. He argues that some are too quick to dismiss all retail as a poor investment, adding that offices also need to be carefully considered on a case-by-case basis: “Generally, we would fund those office assets where the sponsor is already future-proofing the property.” He adds that individual assets’ prospects can be very different depending on which European city they are in.
Laming says: “On the equity side we see offices let at €11-€15 per square metre in some European cities, and they are fully let to tenants who are happy with what they are paying. So, although there are risks attached to the sector, there is also an opportunity if you look at it through the right lens and are able to identify those assets with the right business plan in the right location.”
Pottorff adds that niche, emerging sub-sectors are also interesting from a credit perspective, because they are underserved by lenders: “Anything which is a relatively new sub-sector does tend to get overlooked by the banks. So, for example, self-storage is not covered as well as it should be, and there are specialist residential concepts which I see as an opportunity, such as retirement living or co-living.”
With regard to the firm’s sustainability ambitions, Pottorff explains that although a specific green financing product has not been launched yet, environmental, social and governance scrutiny will be embedded into any underwriting process, based around Tristan’s firm-wide approach. “It is an indissoluble part of the process when it comes to considering risk management and value enhancement,” he says. “You need to partner with sponsors that have ESG factored into their business plans.”
Laming adds: “If you don’t, you can have a material risk that diminishes your returns. For us, it is about seeing through the lens of risk management and value enhancement.”
For now, the debt team is working on several deals in its pipeline. Laming says that although the European debt markets represent a new frontier for the company, the strategy will be rolled out on a gradual basis.
“You’ve got to walk before you can run, otherwise you’ll trip up,” he says. “The market is deep enough, diverse enough and interesting enough that we will always find interesting things to do. But we always need to be able to find good risk-adjusted returns. If that is the case when we are deciding what the next product is, then we will expand because the benefits to us as a platform will just get exponentially larger.”