Martin Wheeler knows about working through a crisis. He and Kevin Cooper set up debt provider Longbow Real Estate Capital in 2006, shortly before the onset of the financial crash. As markets recovered, they struck a 2011 tie-up with asset manager Intermediate Capital Group, which bought the business in its entirety a few years later. Now, they face their next challenge.
Wheeler’s approach as the coronavirus pandemic rattles economies and markets globally? Remain calm, and wait. Wait and watch how the market moves. Wait and see what existing borrowers and investors can shine a light on in terms of trends. Wait and then only get back to the business of investing again when you’re sure the time is right.
“In the current climate, we’re not in any hurry,” says the former banker. “That’s a lesson from the last crisis – don’t be in a hurry to get invested and catch the bottom of the market.”
Wheeler’s business has no lack of money to invest. Last November, ICG’s real estate division reached a final close for ICG-Longbow UK Real Estate Debt Investments V SCSP, its fifth partnership capital fund, at £928m. The fund was backed by new and existing investors from across the UK, Europe, Asia and the Middle East, and will focus on backing loans secured against UK commercial property. At the time of the final close it had committed £455m across 10 deals, including residential properties, hotels and office redevelopments. Since then it has also backed data centre owner Proximity with a £25m loan.
Earlier this year, the company’s fourth senior debt programme reached a first close of £500m, backed by public and private sector pension funds and a UK insurer. At close, the fund had already deployed more than £150m including a £21.5m loan to developer Urban Splash to help finance the regeneration of the Royal William Yard mixed-use scheme in Plymouth, Devon.
Now, new investments will slow. “We’re in the privileged position of coming into this crisis having raised a significant amount of capital in the last year over all of our strategies,” Wheeler says. “But we’re not in any hurry to deploy. Our experience from the global financial crisis told us that it would be a mistake to rush to invest, and we’re sticking to our overriding investment philosophy of capital preservation first and seeking attractive, risk-adjusted returns.”
From lockdown to Ludgate
Wheeler speaks with EG via Microsoft Teams from his home. He is as relaxed and personable as usual, happy not only to dive into deals but also to offer grooming tips to an interviewer whose predilection for facial hair stretches back only to the beginning of lockdown ( “Beard oil is horrible stuff,” Wheeler advises, although if you must invest in products, he recommends Toni & Guy).
Staff across ICG were working from home for roughly a week before the UK lockdown, after the group launched a coronavirus business continuity plan.
“It’s a massive change in how everybody has been working, but it seems to be working well,” Wheeler says. “Part of that is the nature of the work that we do, which does lend itself to being able to work relatively straightforwardly at home. And ICG has invested in a lot of cutting-edge technology, which is making it easier for the teams to stay in contact with each other. It’s not business as usual but business is being conducted.”
We’ve come into this crisis having raised a significant amount of capital. But our experience from the global financial crisis told us that it would be a mistake to rush to invest
The lockdown has introduced some hurdles for an expected office move. Wheeler and colleagues have been preparing to move from their West End office to join the rest of ICG in The Ludgate, a new office block in the City being redeveloped by Greycoat Real Estate and Goldman Sachs International.
Depending on how long lockdown continues for, staff may now not return to the old office at all but instead head straight to The Ludgate in the summer.
Learning from the past
Wheeler and colleagues are now remotely undertaking what he calls a “process of discovery” with borrowers and their businesses as the Covid-19 pandemic continues.
“We’re in the position of having 100-plus investments – loan investments secured by 900-plus properties and 8,000-plus tenants,” he says. “So in the process of speaking to our borrowers, we’ve got a clearer understanding of what’s going on in our portfolio and are able to start thinking about what the risk position is, managing that risk as appropriate, communicating with our investors. But also, that discovery helps us form a vision of the overall market. Once you’re in that position, you can start thinking about making new investments.”
And there are other lessons from the crisis of more than a decade ago, Wheeler adds. “We’ve got some data points now of where the bottom of the market was and what good value looked like in 2009, which will be relevant to today.”
What opportunities come out of a period like this? “Based on our pipeline, we’re seeing a higher number of refinancings than we would ordinarily,” Wheeler says. “We’ve not got massive visibility into what the banking market’s doing but we’re seeing more refinancing coming out of mainstream banks than usual. What’s missing is material new sales activity. That will come later.”
March of the non-bank lenders
Non-bank lenders have enjoyed surging market share in the real estate finance market since the financial crisis. And in the latest UK Commercial Real Estate Lending Report from Cass Business School, “other lenders” was the sole category to post a year-on-year rise in loan origination, at 4%. All other categories of lender posted falls – -2% for UK banks, -23% for German banks and -24% for insurers.
But Cass’s Nicole Lux has suggested this trend could be reversed in 2020 as the impact of the coronavirus is felt, telling EG earlier in the year: “I think non-bank lenders will struggle more than banks, and borrowers are better off right now with banks. They are supported by government schemes which the non-bank lenders don’t have access to.”
She added: “The non-bank lenders will be driven by their investors, who obviously want to see a return, want to see dividends or similar payments. Some of the institutional investors will be happy to give some payment holidays, but not all of them are able to do that. I think it will be the debt funds which will struggle to arrange things with borrowers.”
Wheeler is, as would be expected, more bullish on what non-bank lenders can bring to table.
“I think the borrowers’ perception of non-bank lenders is that they are in the core business they’ve chosen to be in, and are more likely to be finding ways to support their customers in all markets than the banks, which often have bigger things going on in their world than real estate,” he says. “Sometimes real estate can be a forgotten corner [for banks].”
That focus on working closely with borrowers during tougher times has long been a point of pride for Wheeler. “In the parts of the portfolio where our loans are in exposed sectors, we’re working with our borrowers,” he says. “We pride ourselves in all markets on our partnership approach and this is where it’s really needed, to support borrowers in certain instances to ensure the best outcome for all over the medium term.”
What’s in a name?
Amidst the trials of lockdown and preparing the business for whatever the post-pandemic dealmaking market offers, recent weeks contained another milestone for Wheeler.
In late April, some 14 years after he and Cooper set up Longbow Real Estate Capital, and almost a decade since the ICG-Longbow tie-up, the business dropped the Longbow name, becoming simply the real estate division of ICG.
At the time, Cooper described it as “a natural evolution”. And yes, it is only a name, and names can change. But does Wheeler feel a pang of sorrow as he lets go of Longbow and moves on to the next stage of growth for the business he has been building? He seems surprised that it is even a question.
“Kevin and I do have feelings – we’re not robots,” he says. “But there’s not a huge amount of sentimentality attached to the Longbow name. It’s been attached to ICG now since 2011. None of the success we’ve had over the past 10 years would have been achievable outside of ICG, so, if anything, there’s some sentimentality attached to ICG, actually.”
Now, Wheeler and his colleagues are looking to the next chapter of the tie-up. European expansion is on the cards, with a new sale-and-leaseback strategy launched on the continent and tentative plans for a new Europe-focused fund. The market conditions might not be quite what they would have anticipated, and they’ll be taking it steady, as the lessons of the last crisis encourage.
“We’re trying to find opportunities that we believe are defensive in sectors that have structural support,” Wheeler says. “There are also a number of more mainstream opportunities where there is a very apparent shortage of supply and possibly stable demand, where that demand over supply imbalance can ensure strong occupation market fundamentals.
“We think it will be a thin market in terms of acquisitions over the remainder of 2020. Business as usual may resume next year, and we hope it does. But there’s not going to be a tipping point. It will be a gradual return.”
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