Patron’s 7th fund targeting assets ‘in need of a bit of love’

Patron Capital recently raised € 860 million for its seventh fund and managing director and founder Keith Breslauer explained the rationale and strategy. Speaking to Real Asset Insight’s Richard Betts he said that the strategy for the fund is defined as value-add and opportunistic.

“In our world that means we’re investing in a property which needs a bit of love, a bit of attention,” Breslauer said. “It might be vacant, it might need major refurbishment, there’s something that has to be adjusted or done to the asset, it may even be bringing it up to energy standards,” he added.

“Why it’s particularly interesting now is that you have a combination of borrowers who bought assets over the past five to seven years who have been through a significant interest rate shock combined with environmental regulations that have been imposed, or are being imposed, that will require quite a lot of capital.”

He said that for borrowers or owners of assets that have a lot of leverage and who have an issue with ESG may have a problem.

“Even though rates have now flattened and are expected to come down, the combination of debt issues along with ESG issues has created an interesting opportunity.”

The geographical focus of the fund will tend to be the more mature markets, particularly the UK and Germany for about 50%, with 25 to 30% targeting Spain and Portugal. The remainder will be invested in Benelux, France and Italy, but he said that the ESG issue is Europe-wide.

The strategy is sector agnostic but will be driven by the mismatch of supply and demand. “Where is that prevalent? Residential for sure.”

“We like the mid market in terms of buyers, so we’re going to do residential,” he said adding that Patron has never done high-end residential.

Buying cheap “always is helpful”.

“As a general point the entry price of an investment is the most important starting point because if you get it cheap enough, or if it’s of good value, then you could continue to earn very good money from it.”

The budget required to improve an asset’s ESG credentials is variable.

“Somewhere between 5% and 20-25% of total cost is estimated to be the ESG refit,” he said. “The range is significant because you’re not sure what kind of quality building it is.”

“There is a view that hotels have a requirement of 15 to 20% to convert so 15 to 20% of the cost of a property is what it will cost. In our experience, it’s more on the lower end of the range but it really depends on what you end up doing.”

“Since we’re usually refurbishing the entire building anyway, the extra environmental aspect is a relatively small percentage because we’ve still got to spend the money on the refurb. It’s more a matter of making sure that we’re building it to the right standard.”

The fund’s first investment is the acquisition of the Livingston Factory Outlet in Scotland where significant refurbishment is needed to the roof.

“The management did a very good job of managing the asset but the capital structure was not robust and therefore we saw an opportunity to acquire the investment to refurbish the roof and other things to drive up the quality standard.”

Although Patron’s main preoccupation is obviously real estate Breslauer allocates time and money to charity including a fund which provides permanent housing for women suffering domestic abuse, and a charity that provides professional development for state school teachers. Breslauer also supports Royal Marines veterans and is planning a D-Day anniversary kayak paddle from Portsmouth to the D-Day beaches in France later this year to raise money for the Royal Marines’ charity.

“I did something similar 10 years ago when we went from France to the UK. Hopefully we could recreate that although I am 10 years older.”