How did you get started in real estate investment?
I started with some entrepreneurial investments in the US and then after getting an MBA, enjoyed a long career in real estate at Goldman Sachs. My last assignment there was to help launch the European commercial mortgage lending activity that Goldman wanted to undertake out of its Fixed Income division in London. After I left Goldman, I had a partner in the U.S., a publicly listed CDO/CLO manager, and we worked together to try and launch a commercial real estate CDO business in Europe during the 2007 period. We took in some commitments from predominantly U.S. hedge funds to get that business started. Unfortunately, the financial crisis came to the UK a bit early in 2007 and we took the decision not to proceed, cancelled the investors’ commitments. Very painful decision at the time but clearly the best course of action, especially in hindsight.
Shortly after that you moved to M&G – what did you do there?
I started the real estate lending business within M&G. There was a very forward-thinking Fixed Income CEO there – Simon Pilcher – who had the vision to add this new idea into their portfolio. And so, I joined as the first person to start the business back in 2008, which was to try and bring permanent institutional capital into the European mortgage lending space. Prior to that time commercial mortgage lending in Europe and the UK was more than 95% bank-led and so the alternative lenders did not exist much in 2008 when we started. Bringing institutional capital into this space – that really was something quite new. I can tell you a lot of people told me it would never work and that this was a short-lived opportunity to get into this business but that it was not something that would be sustainable long-term.
How would you characterise the intervening 14 years in that debt lending alternative space? It certainly hasn’t been the short-lived experience those people were predicting.
No, we along with a couple of other firms, pioneered a new business in Europe – the commercial real estate lending business within the asset management industry. Alternative lending into real estate is something that M&G and a few other firms decided to give a go and there were probably 40 or 50 firms that wanted to get into this business, but it was a difficult market environment. The global financial crisis meant that for most traditional real estate investors the value of their portfolios had fallen 30%-40% in some cases and the idea of starting a new strategy that had never been done before in a European context with managers, none of whom had executed on this strategy – that was a difficult environment in which to ask investors to give capital over and it took us two or three years to really convince people. By 2010-2011 when things started to look a little bit more stable, then investors were willing to put some capital into these ideas.
We launched our business in that environment and the idea was that with values falling and mortgages coming due, borrowers were going to need to find new sources of capital because the banks had retrenched significantly. They had over-exposed themselves to real estate and needed to shrink their books. They had a lot of non-performing or sub-performing loans to get rid of and so they were also keen to find new outlets to lay off some of their existing debt as it came due. And so really the idea was to provide gap funding – filling up the gap to bridge the shortfall between what the banks would be willing to lend on a new basis and the old debt.
Where has that journey arrived at in 2022 – alternative debt lending is a pretty established part of the lending landscape now – would that be fair to say?
I think it’s fair to say that maybe we’re in the late-early innings or early-middle innings to use an American baseball analogy. If we look for example at the U.S. market which is a well-diversified lending market, banks lend probably about 50% of the capital into commercial real estate lending and the balance is made up by a combination of insurance companies, mortgage REITS, alternative lenders and the securitisation market. In Europe, we still only have banks and alternative lenders. The alternative lenders, depending on whether you are in the UK or various countries in Europe might constitute somewhere between 10% and 25% of the total new lending activity that’s going on. I actually think there’s quite a long way still to go.
Do you see the European alternative lending market becoming more like the American market in terms of diversity of players or is there something intrinsic in how both markets are set up that will keep Europe having more traditional lenders?
I think the latter is probably true. The U.S. market has a large securitisation market and a significant portion of that market is backed by guarantees of single and multi-family homes through the quasi-government entities Freddie Mac and Fannie Mae, so some portion of the market is securitised automatically, and the commercial mortgage-backed securities market is significantly larger. And frankly in Europe, our CMBS market will remain tiny as a part of the market. I don’t think alternative lenders will get to 50%. The part of the market that does exist in the U.S. that I think will grow here is the traditional insurance company. The mortgage REIT market I don’t think will be very large. In the UK and European context, we will probably be looking at banks, insurance companies and alternative lenders as the predominant part of the market.
And to where you are now – congratulations on founding with two colleagues – Girona Partners. What was the rationale for that? Why now and what are you trying to do that is different?
The idea is to start on our own. My colleagues (Jamil Farooqi and Peter Foldvari) and I co-founded the business at M&G and now we are trying to do it again on our own. We believe we have an insight and track record in the market that we hope investors will find interesting and something they want to support. The asset management space is moving to a consolidated space of big players, but I think there still remains opportunity for specialists within specific strategies to achieve support and deliver returns for investors. I think as we look out at the horizon with the backdrop of rising interest rates and broad economic challenges, I actually think this is a very attractive time to be in this lending part of the cycle. The fundamentals are different, but the risk return opportunity looks very much like the period from 2012-2014 which was a super attractive time to be a lender in the commercial real estate space.
What type of a business are you aiming to build in terms of types of clients, deals and sectors?
We emphasised doing large loan investing while we were at M&G, so our track record is in those larger assets, so we would expect we would continue to do that. We would like to provide whole loan solutions to borrowers and that will be across investment, transitional and development assets. And for investors who will be our clients, what we are hoping to be able to convince them is that we are experienced, we’ve done this together through multiple market cycles over the past 12 or 13 years and that there is a benefit to hiring expertise – we have a long track record of delivering attractive returns. I think we’ll look across geographies and asset types as well.
What I think we have to do is to provide solutions to our clients who don’t want to be in a cookie-cutter format or just do one thing. So, a little bit of this will be about understanding individual clients’ bespoke risk return requirements. There’s a whole backdrop as to what do the clients need and look for and where can they achieve returns in this market that look attractive to them and I think being able to speak intelligently about that and to have an insight into – ‘hey we’re not just trying to grow AUM and scale up’ – but really to be focused in a bespoke way on what the clients are looking for hopefully will enable us to attract support.
Given the desire to offer large scale loans, how are you getting along with raising seed capital?
We’re still in early days. The process for raising capital is a time-consuming one and we’ve really only just begun that. We are in discussions with some investors and what we’d like to do is secure an anchor investor. If we’re successful there hopefully that will accelerate our ability to attract third party capital quickly thereafter.
It must be an exciting time. Is it equal parts daunting and exciting?
I am excited. I like starting things very much. I like building things and building businesses. I think the market opportunity is very exciting. I think the next few years will be the best investing environment in these sorts of strategies, that we’ve seen probably in the last decade. So that part excites me as well. Daunting? Yes, it’s always daunting. Raising capital is challenging, it’s probably more challenging today than it has been in the past. The pandemic certainly has put people into a different mindset and framework in terms of making capital allocation decisions and I think the pandemic’s impact on fundamental real estate markets has changed what sound investing might look like and how to do it. And I think all of that is intellectually challenging. So that part is quite exciting.
There’s no shortage of things on the horizon between war in Ukraine, inflation, interest rates changing dramatically, changing governments – what do you see as the macro environment that you’re operating against here – it is filled with uncertainty but that can be good too.
For people in the alternative and opportunistic space, volatility and uncertainty can provide real opportunity. But it makes things like stock selection and conviction quite important and highly valued. And I think it’s a time when making sound judgement can be a distinguishing feature – the backdrop is challenging. As investors look at Europe in particular, the war scenario is presenting some differentiated challenges. The rebasing of the European energy supply system is not an overnight affair and that is going to take some time to work its way through markets and the economy in general.
The question of what Government support is being provided during that transitional period could also have an impact on fundamental market conditions. Clearly, on interest rates, the world has benefitted from near-zero interest rates for a very long period of time but in the last 12 months in the UK and Europe, we’ve seen somewhere between 250bps, and 350 bps added to the base rate borrowing costs. And that has an implication for equity values. With rising interest rates, fixed asset values typically tend to fall, and I expect they will fall and have already begun to fall.
I’ve heard so many commentators talking about a perfect storm going on right now across almost every asset class – an existential moment. Do you see it that way, that across every sector there are fundamental challenges?
Fundamentally I agree. There are fundamental shifts coming into play across the real estate industry and virtually across every sector. This will force people to tear up the rule book and look afresh at how these assets perform over time. I think you have to start with the backdrop that says real estate has been in a transitionary period having gone from a secure, income-based asset class, which allowed people to take out longer-term financing at modest risk. Now we have to accept that real estate across all sectors has moved to an operating asset class.
The working from home environment is having an impact on offices. Hotel sentiment has shifted from city centre to resort. Obviously retail has experienced something akin to systemic shock. The other big backdrop is the requirement for ESG and particularly in the real estate space, the environmental considerations. Assets that can deliver into the future with reduced carbon footprints from conception to obsolescence are going to be more valued than historic buildings that are below par or sub-standard on those metrics.
You’re interested in mentorship and have done a lot in this area – why is being a mentor important for younger people coming into the industry?
My journey in mentorship started a long time ago in the United States and I was fortunate to be involved with an individual who had a quite extraordinary journey. And I think that sparked my interest in this. In a professional context and in particular today, where we have a very significant shift towards the working from home environment, mentorship is even more important. The idea of building knowledge, shared experiences and working relationships through time, I think is increasingly important. I think if we’re going to grow our industry, we need outreach not just across age and not just in one direction. I’ve been introduced to the idea of reverse mentorship where people in the later stages of their career have to be willing to learn from new people coming into the workforce about how the world has changed and how today’s young professionals think about the work environment. I think whether it be through social diversity, economic diversity and all of the other ways we need to expand how we think about the world, I think mentorship is important for that.
What is the safest call you can make concerning the next 18 months?
There’s no secret to this. I think it is likely the case that most real estate equity values will fall. That is why a defensive strategy like real estate debt looks more interesting in the current environment because we are likely to see valuations decline. Real estate tends to lag the broader market fundamentals.
Where do you hope to take Girona Partners over the medium term – say 3-5 years?
We’d like to build a business that is sustainable and can be one of the leading managers in the area in which we have specialism. In this real estate credit space– and I’ll call it both traditional and strategic credit or special situation type investing – we’d like to do both. And we’d like to build one of the leading independent managers in that space. We’re quite ambitious. We want to be large in scale and that requires large pools of capital.