A number of key names in the private equity and other private investment businesses have created REIT structures over the course of this year because of the tax benefits they offer key LPs.
Among the well known firms adopting REITs are Kohlberg Kravis Roberts, Cerberus Capital Management, GSC Partners, and CapitalSource. KKR, which raised $800 million in June through an IPO of its REIT, will use the trust to allocate capital to residential, corporate, and commercial loans and mortgage-and asset-backed securities. However, under current law, KKR is not permitted to use the REIT for its traditional buyout activities.
Most recently, CapitalSource, a commercial lender active in financing mid-market buyout deals, announced that it will opt to be taxed as a REIT beginning in 2006. To explain this decision, the Chevy Case, Maryland-headquartered CapitalSourceclaims the new structure will increase tax efficiency and ?unlock substantial shareholder value, as described by Capital-Source chairman and CEO John Delaney.
Soon after CapitalSource's REIT adoption announcement, the firm assured the public that it would continue to operate as a commercial finance company, rather than shift its focus to the real estate industry. Of CapitalSource's currentactivities thatwould countas ?qualifying real estate assets for REIT status are the firm's commercial real estate, health care real estate, and other real estate-secured asset-based loans.
According to Rosemarie Thurston, chair of the real estate securities team of US law firm Alston & Bird,?Many of the investors in private equity funds are pension funds, which are tax-exempt organizations but are required nonetheless to pay taxes on unrelated business taxable income (UBTI). Since REITs generally do not generate UBTI, and are pass-through entities for tax purposes, the REIT structure is highly attractive to pension fund investors.?
?As pension funds increasingly realize the benefits of allocating a substantial portion of their portfolio to real estate, they are finding that REITs are a good vehicle to accomplish their diversification goals,? says Thurston.
For this reason, REITs are particularly attractive to private institutions, while public and state institutions can invest directly in the partnership without being subject to taxes and therefore may be less interested in the UBTI-blocking features of this type of trust. Foreign investors are also eyeing domestically controlled REITs, which act as FIRPTA (Foreign Investment Real Property Tax Act) blockers for non-US based investors.
As seen in the case of KKR, most private equity firms adopting REITs are restricted from using those structures for their normal buyout activities. To qualify for earnings tax-exempt REIT status, no more than 25 percent of the REIT can be allocated to corporate assets, as opposed to real estate assets. However, it is not unlikely that enterprising private equity firms will attempt to push existing boundaries on the use of the REITs to encompass their other investment activities as well.
American Capital expands, securitizes
Publicly traded debt and equity investment firm American Capital Strategies has expanded its presence in Europe, and issued rated bonds backed by its US portfolio. In Europe, the firm has launched European Capital and closed an inaugural fund with €750 million ($900 million) in commitments. European Capital was launched in April with a Paris office. Last month the firm announced the opening of a London office led by Simon Henderson and Nathalie Faure Beaulieu. Henderson joins the firm from Barclays Private Equity while Beaulieu was with Mezzanine Management UK. In other news, American Capital, based in Bethesda, Maryland, has issued $830 million of investment grade notes backed by the senior and subordinated loans in its portfolio. American Capital retained $170 million worth of BBB-rated and unrated notes, often described by collateralized bond obligation specialists as the ?first-loss tranche.
MVC Capital names CFO
Publicly traded debt and equity investment firm MVC Capital has named Peter Seidenberg as chief financial officer. He replaces Frances Spark, who will step down to work for the fund as an investment professional and to provide administrative and other services for portfolio companies, according to a press release. Seidenberg joins MVC from Plumtree Software, where he as director of finance and business development. Before thathe was manager of financial operations for electronic materials at AlliedSignal. MVC, officially a ?business development company, was formerly MeVC, a publicy traded venture capital firm. The company was taken over by former KKR partner Michael Tokarz following weak performance and transformed into a mezzanine debt and private equity investor to middle market companies. The company recently announced the initiation of a quarterly dividend to shareholders.
Jesse Reyes lands at Crane Capital
Jeyes Reyes has now joined Toronto-based placement agent Crane Capital Associates. The hiring comes more than one year after Reyes left Venture Economics, where he served as the vice president of global product management and development. Reyes joined Venture Economics in 1989 and, according to his biography, served as the ?primary visionary behind the release of VentureXpert, the online data product of Venture Economics. Prior to that, Reyes served as assistant professor of finance and applied economics atTexas Tech University, where he also received his MBA. Reyes was also the founder of Texas-based Decision Research Associates, a software firm that specialized in oil and gas partnership accounting. At Crane, Reyes will lead the firm's US origination and due diligence efforts. Crane, which was founded by Alex Logie and Leo Van Den Thillart, is based in Toronto and maintains offices in New York, London, Munich and Sydney.
AXA to receive GIPS certification
AXA Private Equity, a European private equity fund manager with €7 billion under management, will receive certification for adhering to the Global Investment Performance Standards (GIPS) this year. AXA Private Equity – which has offices in Paris, Frankfurt, London and New York – is the first capital investment company in France to receive GIPs certification. Recipients of GIPS certification must conform to international ethical norms for presenting performance, as confirmed by a third party. In the case of AXA, the firm's audits were carried out by PricewaterhouseCoopers.
KKR and Apax strengthen investor relations
Kohlberg Kravis Roberts (KKR) has recruited HarbourVest Partners' Christina Pamberg as head of investor relations and co-investments for Europe. Pamberg joins KKR in the newly created role from private equity fund of funds manager HarbourVest's London office, where she was a vice-president responsible for secondary transactions since 2000. She was also actively involved in the firm's fundraising efforts. At KKR, Pamberg will be responsible for maintaining relations with investors regarding portfolio company performance, as well as coordinating coinvestment activities. Meanwhile, Apax Partners has expanded its investor relations team with the appointment of Baring Private Equity Partners' former investor relations manager, Rachel Lambert. Lambert, who started at Apax Partners in September, will report to Joanna Armandias, director of investor relations.
Littlejohn expands into distressed securities
To lead its entrance into distressed securities investing, private equity firm Littlejohn & Co. has appointed Robert Davis and Richard Maybaum as new partners to the firm. Davis joins Littlejohn from Los Angeles headquartered Oaktree Capital Management, where he led the group's mezzanine practice as a managing director. Meanwhile Maybaum was most recently at RamiusCapital Group, where he also managed distressed securities and structure arbitrage portfolios. Littlejohn, based in Greenwich, Connecticut, was formed in 1996 by Angus Littlejohn Jr., who was also one of the founders of New York-based investment firm Joseph Littlejohn & Levy in 1988.
DLJ veteran leads West Coast expansion
DLJ Merchant Banking Partners has chosen managing director Susan Schnabel to lead the firm's return to the US West Coast. Schnabel, who will be in charge of growing and developing DLJ's newly opened office in Los Angeles, joined the firm in 1990 and is currently the co-head of its private equity operations in Europe. Schnabel was among the 30 partners staying with the firm to oversee DLJ's existing portfolio companies after Thompson Dean left DLJ to create a new firm, Avista Capital Partners, earlier this year. DLJ, the middle market private equity affiliate of Credit Suisse First Boston, had previously set up shop on the US WestCoast, also led by Schnabel, but the office was abandoned when Schnabel was reassigned to the firm's European operations. According to DLJ, the firm manages some West Coast companies in its portfolio, and the establishment of the Los Angeles office is expected to facilitate deal flow and investor relations. The Los Angeles office expands DLJ's existing presence in New York, London and Buenos Aires.
Philadelphia entrepreneurs honored for VC support
At a recent conference on mid-Atlantic venture investing, Rebecca Matthias of Mothers Work Inc and Michael Zisman of Soft-Switch were honored for their achievements in the entrepreneurial community in Philadelphia, Pennsylvania. The two were inducted as the first members of Mid-Atlantic Venture Conference's (MAVC) Hall of Fame, sponsored by industry association Greater Philadelphia Venture Group.