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Tristan Capital Partners is celebrating its 5th anniversary this year with a string of successes in terms of equity raising and investment.

Earlier this year, the fund manager capped the final equity raise on its EPISO 3 value-add/opportunistic fund just short of the €1 bn mark at €950 mln, exceeding its original fundraising target by 25%. The company currently has €5 bn of assets under management, accumulated in as many years.

And, following a big industrial portfolio sale earlier this year, the company is poised to seal another major transaction that would bring its industrial disposals for full-year 2014 to just under €1 bn. According to unconfirmed media reports, Tristan is selling a package of assets in Germany, Austria, Poland and the Czech Republic to PointPark Properties (P3) for just under €500 mln. Both Tristan and P3 have declined to comment on the market report.

The deal would mark the second major industrial portfolio sale in almost as many months. In February, the London-based investment firm headed by Ric Lewis announced it was selling a package of 14 industrial assets in Germany, Poland and France on behalf of two funds that it manages to Segro. The UK REIT acquired the package on behalf of its European Logistics Platform (SELP), a partnership with Canadian pension fund PSP, for €472 mln.

A PENCHANT FOR PIECING TOGETHER PORTFOLIOS
Commenting on the sale to SELP, Lewis noted that Tristan had pieced together the portfolio – the bulk of which includes industrial assets that are less than five years old – from reputable but overstretched vendors at a time when institutional investors were still sitting on their hands and wary of touching anything less than 100% core. ‘We bought the assets knowing they were mispriced with a plan to fix them individually.’

The deal reflects a blended yield of 7%, roughly 250 basis points lower than the price Tristan paid at the time and it is understood that the Project Bora Bora sale to P3 could generate a similar return if it does go ahead later this year.

The Segro sale came sooner than expected, Lewis said. ‘We definitely benefitted from the momentum play on logistics,’ he conceded, pointing to a string of mega industrial and logistics transactions in the past 18 to 24 months including the likes of heavyweight investors such as Norway’s Norges (in a partnership with US specialist Prologis) and Canadian private equity giant Brookfield which recently acquired Gazeley from its Dubai-based owner.

Fixing broken assets and turning them into institutional quality is a theme that runs through Tristan’s investment funds and those of predecessor vehicles that Lewis launched and operated under the Curzon flag. Lewis: ‘Our business plan is about buying mispriced assets, fixing them and selling them off individually. But at a certain point we found ourselves with €1 bn worth of logistics assets in our portfolio at a time that analysts were saying to public entities that they were underinvested. We saw an upswing in liquidity and a capital markets opportunity on top of the real estate opportunity.’

Lewis aims to replicate the successes so far in other regions and sectors across Europe. ‘We have some things in the works, but our strategy is not revolutionary, we’re just playing a different work. We’ve done it before and it makes sense.’

Tristan’s initial geographic focus since the onset of the global financial crisis has been predominantly on Germany, Austria, Poland and the Czech Republic but has now shifted to include France and the UK as well as southern Europe. At a time of poor liquidity and financing, the CEE countries acted as proxies for Germany’s economic growth engine, Lewis noted. ‘We invested in places that were relatively healthy with low labour costs where poor GDP growth in recent years was due to low financing opportunities. But their economies are starting to improve and they have a deep capital base and liquidity. We’re seeing similar potential for recovery now in France and the UK.’

More recently, Tristan has developed a clear penchant for retail, acquiring assets in regional cities in the UK as well as in mainland Europe. ‘We have a significant retail portfolio now,’ Lewis said. ‘When economies are troubled, the first place in the real estate market that is going to start to exhibit recovery is retail. We’re now seeing the first signs of growth there. Consumers are starting to spend again and retail real estate generally benefits from that. Institutional investors believe retail is a way to tap into an economy. For a while we saw a deflationary environment in Germany, but the economic engine is back again and taking us through the recovery.’

Over the past few years, Tristan has built a sizeable retail portfolio in Germany and Poland and more recently, in the UK. ‘Many times in past cycles we have been significant investors in retail, ahead of and into a recovery. We have acquired a big holding of UK retail at a time when people thought it was clearly countercyclical. But now that the economy is turning around, they’re starting to think maybe that was not a bad play.’

TOUGHER MOMENTS
The going has not always been easy, Lewis conceded. ‘There have been some tougher moments in holding those assets. There was a time that retailers were really beating owners about the head with demands for three-year rent-free periods on a 10-year lease with a five-year break. But we were well-capitalised enough at a time that we knew we were headed right into a storm and we bought those assets on a good basis. So because we had capital and staying power, we able to say no to those demands, and luckily conditions have now changed. There is more parity now and some retailers are expanding and want to be in our centre. They still want concessions, but they are more reasonable now. I’ve seen a huge change of momentum. We’re not near the selling time yet, but we see that institutional investors are going in now. In two to three years down the road, we will be a net seller of retail for some people who want long-leased durable income exposure to UK retail.’

Another coup for Tristan this year has been an unreported transition of the EPISO I and II funds that Tristan has managed on behalf of AEW Europe for the past five years since Lewis broke away from the former parent company and set up his own business. Tristan has confirmed that the funds are now part of its portfolio, but that AEW Europe would stay on as co-investor in the vehicles. The company declined further comment.

Lewis launched Tristan Capital Partners in April 2009, just six months after the onset of the global financial crisis. The newly formed company was able to take with it a sizeable number of clients from predecessor vehicles under the Curzon and AEW Europe flags due, Lewis said, to a legacy of good will thanks to good performance.

‘When we look back, we are pretty humble and we had a lot of good luck. We couldn’t have scripted the way things went, clients came on board without asking. At some level it’s reinforcing good behaviour and good performance. At another level it’s just good luck. But the rest of it has been a lot of hard work. In retrospect, you could ask whether the beginning of the global financial crisis was such a great time to start a business. Some people would say it was the stupidest time. I’ve always thought it was the opposite. If in the middle of the destruction you can garner the resources to make all of your early mistakes and set up your foundation while the world is in disarray and prepare yourself for when it comes back on line, it has to be the best time to start a new business.’

That is not to say it has all been plain sailing, he added. ‘The difficulty some time is finding and realizing the opportunity in the middle of the maelstrom. That’s where we were, I think, part forward thinking and part fortuitous. Some things in retrospect fell into our hands, some of it was the product of hard work and good client relationships in the prior 10 years. But you couldn’t script some of the things that have happened.’

GLOBALISATION IS A ONE-WAY TRIP
Initially, Tristan’s client base was focused primarily on its home market in Europe with EMEA accounting for 95% of the total. Now the geographic split is more equal across the globe with EMEA and the US both accounting for 40% and Australasia making up the remaining 20%. The globalisation of real estate markets is here to stay, Lewis claims. ‘I think that’s a one-way trip. There is more and more interest from outside of Europe. We want our roots to still be European institutions and family offices because I think it’s great if people from your home region where you invest say, these guys know what they’re doing. If the people who know you best say that, then we will also have credibility with people outside our home market. I don’t think we’re going to go back to 95% Europe because I think we have a growing following of clients outside the region. Over time it will ebb and flow, because people will be more or less interested in Europe depending on the cycle. But I think our client base will be global, and we have adjusted to that.’

While the bulk of the growth of the client base has so far come from US investors, Lewis claims Asia has just as great potential as the US. ‘If I look at the number of investors that number is a lot bigger. The great thing about the Australasian market is that it isn’t one or two markets, its Japan, China, Malaysia, Korea, Australia, even New Zealand. There’s a lot of capital there making its way here.’

Europe is currently in the eye of the world due to a cyclical upswing in its relative attractiveness to the outside world, Lewis noted. ‘That is very different to 12-15 months ago. Fifteen years ago nobody wanted to hear about Europe. Europe was old, grey, dying, it had a bad central bank and a poor currency. But now there’s a recovery story going on and Europe is more attractive than the US which has priced through its restructure and Asia which is slowing from an outside perspective. I think we’re in the early middle innings of the attractiveness of Europe. We’re seeing a lot of capital in the last 6-9-12 months that wants to invest here. The question is how effectively is that happening.’

All in all, Lewis said he and his partners were ‘incredibly pleased’ with the progress so far. ‘We set up a business plan to get to about where the firm now is. Our brand is out there and we are profitable. We held the third largest fund raise in Europe last year and the truth is that we are ahead of our business plan in almost every way. We’ve done a relatively good job, which is nice, but we’re not complacent. We’re constantly looking at where we want to be two, three, five years from now. That has held us good stead in the past and that’s why we have the discipline to think about where our industry is going and what will we need to do to be competitive, what do our clients want and what are the interesting opportunities that will help us marry all those thing together into exemplary performance.’

Five years since its launch, Tristan Capital Partners now has €5 bn of assets under management, but Lewis claims that further growth is not a goal in itself. ‘I’ve always been someone who says, size matters, but in terms of size and footprint, we are where we need to be. I’m indifferent to whether we have an AUM of €5, 6 or 10 bn. We have 80 people; we’re already at a significant size to be profitable, to retain high-quality talent and to invest in the raw materials that make us good at investing. Those are the key things for us. As long as we are able to keep investing in our own R&D and keep good talent, we don’t need to be any bigger. I love the fact that we’re a boutique firm, that means we stay nimble. Competition is rapid and rife throughout our organisation and that is key to our success.’