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UK: NEWS PROFILE - US FORTRESS LAYS SIEGE TO UK MARKET.
6 Aug 1999
Fortress is the latest American outfit to enter the UK property market with its bid for the giant Inland Revenue portfolio. In its first UK interview, Clayton Hirst profiles the company's European team.
To those who see the flood of US money into the European property market as an invasion, the arrival of the latest name will seem rather apt.
New York-based Fortress Investment Group has a war chest brimming with $400m (�250m) cash for an opportunistic raid in the UK and continental Europe. Last month it was revealed as a serious player when the government announced that it was a shareholder (with George Soros's Quantum Realty Fund) in Mapeley, one of the five shortlisted parties for the Inland Revenue PFI project - estimated to be worth more than �1bn.
Despite its high aspirations, Fortress is just one-year old. It was formed when four UBS Securities partners left after the bank merged with SBC. The company grew rapidly and today employs 57 professionals with offices in New York, Toronto, Tokyo, and - since January - London. The European side of the business is run from a small office in London's St James's by Mark Newman and Gordon Smith, two typically American businessmen.
People who have had dealings with them describe the pair as razor-sharp, clean-cut, super-efficient and corporate; quite a contrast to the often clubby traditional UK property scene. But unlike some of their US compatriots, Newman and Smith are said to have a good sense of humour.
Like its rivals at Goldman Sachs, Blackstone and Security Capital, Fortress sees untapped value in Europe. Smith says: 'The arrival of EMU, which is imposing strict monetary criteria, is spurring governments and companies to reduce their direct property holdings.' Newman adds: 'This produces a much more liquid and transparent market, which we want to take advantage of.'
As a result of these macro trends, Fortress is hunting for three types of investments: private and public sector divestitures, opportunistic financing and portfolio acquisitions, including distressed assets (where income doesn't cover debt repayment).
One UK player who has had dealings with Fortress says: 'When we spoke to them, their focus was very much on picking up distressed assets, where their rationale was "Why pay a pound for a pound?"'
Coming from an investment banking background, Newman and Smith are well versed in the intricacies of structured finance. One concept, securitisation - the conversion of an income stream into a tradable security - is something they hope to apply in Europe. Asked if Fortress would securitise the Inland Revenue estate if its bid was successful, Smith says that it is too early to say.
Fortress's first European deal was in Italy, where it bought a non-performing mortgage loan portfolio from a regional bank. The company's first UK deal still illudes it, but this is not for want of trying.
Earlier this year, it had talks with Antler Property, the private property company run by Alan Welsh, about acquiring a 50% stake. However, it is understood that talks collapsed over price.
Fortress also narrowly missed out on buying a slice of a �106.5m office portfolio from Equitable Life. The insurance company ended up forming a limited partnership with Frogmore to do the deal.
Smith says that Fortress is now close to buying a 'substantial office portfolio in western Europe' from an owner occupier.
With competition from the US as well as UK players, does Fortress have an edge? Newman says that the way the team works is key.
Most Fortress employees have a connection through either UBS or BlackRock, another US fund. Since 1994, the four founders' careers have moved together; first at BlackRock - where they took a stake in the �1.7bn MoD Married Quarters' Estate - and then to UBS's principal finance and real estate finance group. Smith worked at BlackRock and Newman worked at a 'high-leveraged group in Canada' that did a number of joint deals with UBS. 'Because there is a core group of people who have worked together, we have a common understanding of how each other works,' says Newman. Whether this gives Fortress the edge in an increasingly crowded European market remains to be seen.
FORTRESS: FACTS, FIGURES AND VIEWS
Formed: June 1998
Founders: Wes Edens, Robert Kaufman, Randal Nardone, Erick Nygaard
European partners: Gordon Smith, Mark Newman
Fund type: private investment trust
Firepower: $400m (�250m) excluding debt but including $50m (�31.3m) of partners' cash
Investment philosophy: 'We are long-term investors, not traders. We seek to add value by improving ... operations, management and information flow.'
One analyst, who has met Fortress, says: 'On the positive side they have an office in London, which makes it easier to make contact with people and hunt out deals. But their return criteria is very demanding in terms of what they consider to be a hit, which could make it difficult to find deals.'.
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