This post first apppeared at The Hedge Fund Journal
RoundShield Partners, which manages assets of approximately $2.8 billion, has received The Hedge Fund Journal’s Alternative and Private Credit award for the Best Multi-Vintage Performance in the Special Situations – Europe > $1bn category, based on its average IRR as reported at 31 December, 2020 across 2014 (RoundShield Partners Fund I), 2016 (RoundShield Partners Fund II) and 2018(RoundShield Partners Fund III) vintages.
The awards were powered by Preqin data. Returns for the 2020 vintage are not yet reported by Preqin. The IRR figures would have likely been higher if the firm’s circa EUR 250 million of co-investments were included, since the co-investments charge lower fees.
RoundShield continues to target, and deliver, gross fund-level IRR performance of around 20% and an average gross multiple of 2x (net IRR range of 12-15%) notwithstanding the general trend of yield compression in the direct lending space. “We have definitely seen compression in more plain vanilla lending but not a material amount in more complex situations,” says Founder and Managing Partner, Driss Benkirane.
RoundShield is aiming for annualised equity-like returns, and some deals do have equity kickers, but most returns come from the fixed income component of structures. “It depends on the fund but if I had to guess I would say that about 80% of our returns across all funds have been driven by the contractual element of our economics,” says Benkirane. Deal multiples have been between 1.5x and 2.5x.
Though the returns are high, there is also a safety-first mentality. There is no fund level leverage, and little or no asset level leverage. The performance is mainly a reward for taking on special situations that scare away other investors. “The premium is without a doubt driven by complexity today. It doesn’t seem that the market really ascribes much of a premium to illiquidity these days,” says Benkirane.
Western European deal sourcing
RoundShield’s search for deals sounds like trying to find a golden needle in a haystack. It works with over 2,000 deal intermediaries, and reviews 1,500 deals in a year – but might only invest in five. Deal sourcing is an important competitive edge in fragmented European markets. RoundShield’s network of offices in Jersey, London, Luxembourg, Madrid, Paris and Geneva, and staff speaking 13 languages, source deals via relationships, joint ventures and agents. The best opportunities are often unearthed off market.
Joint ventures can also provide deal-flow. For instance, “Resolve is a JV with a UK insolvency firm to recapitalize the balance sheets of stressed and distressed UK companies, purely on an asset-backed basis. It’s not a separate fund but rather a JV between our Fund IV and the partners of Resolve. We have numerous such relationships across specific asset classes and geographies,” says Benkirane.
RoundShield has also provided a line of credit of up to GBP 200 million to UK-based Puma Property Finance Limited, which originates bridge and development loans for property, in sub-sectors such as hotels, leisure, retirement living, care homes and supported living.
The UK is one example of a country RoundShield is familiar with that has an appropriate legal framework. “We only invest in markets where we have deep relationships, in-house local knowledge and where we are comfortable enforcing if necessary. Currently, our focus is purely on western Europe, which we define as Scandinavia, Ireland, the UK, the Benelux, Germany, Austria, France, Spain, Portugal and Switzerland. We don’t necessarily have a favourite jurisdiction as the opportunity set is dynamic and a certain jurisdiction could be interesting one year but not the next. When a geographic market exhibits too much liquidity and therefore yield compression, we shift to markets that are less competitive,” says Benkirane.
Loans must have asset backing, which tends to include a wide variety of real estate. “We define real estate quite broadly. Across our funds we have had exposure to homebuilding, student housing, social housing, etc. to more operational assets like nursing homes, self-storage, pubs, restaurants and nursery schools and then far more esoteric real estate such as cemeteries and golf courses. We also lend against renewables and other infrastructure assets, other hard assets and financial assets but we do not lend purely against cashflow,” says Benkirane.
The sought after Les Bordes Estate in France’s Loire Valley is one of RoundShield’s higher profile investments. The estate’s golf club is running as a going concern, but RoundShield underwrites deals to a conservative stressed scenario of liquidating assets: “We don’t focus on revenues, EV or EBITDA but rather on the liquidation value of the underlying assets,” says Benkirane. This margin of safety mentality harks back to the origin of the firm’s name. “When we started the firm, our primary goal was the preservation of investor capital, and we therefore chose a name which conveyed a “defense first” approach to investing. Whilst we are of course very sensitive to generating strong risk-adjusted returns, we first and foremost seek to protect our investors’ capital,” says Benkirane.
The strategy builds on the founders’ prior experience but narrows the geographic and strategy focus. Benkirane was previously Partner and Head of Real Estate at ESO Capital, working on special situations in areas such as gaming, lodging and homebuilding. Co-founder, Jonas Hybinette, and partner, Gareth Fowler, were colleagues at ESO. Benkirane also invested in private real estate at Highbridge/DB Zwirn and JPMorgan Partners and Hybinette had the same focus at Fortress and Goldman Sachs. “The strategy is similar to what I did at Highbridge/DB Zwirn and what my co-founder Jonas Hybinette did at Fortress except that we are now purely focused on western Europe and asset-backed investments. So, I would say that we are more specialized and have a team of 44 professionals covering a strategy that may only be covered by a handful of dedicated professionals at the larger multi-strategy firms,” says Benkirane. Other investment staff have been drawn mainly from banks, advisers and private equity firms: TPG, Blackstone, UBS, Nomura, Houlihan Lokey, Waterland Private Equity, Societe Generale, Deutsche Bank, Morgan Stanley and PJT.
Origination and structuring
RoundShield originate most of their own deal structures, including private debt, private equity, rescue financing, and sometimes distressed assets and debt. “We have never shared a deal with another fund. We like to retain control of our positions and have thankfully had the support of our investors (through co-investment) on deals which required more capital than our funds could hold on their own,” says Benkirane.
Ticket sizes are in the tens of millions: “We try to build up to at least a €20 million size per position and I would say that our sweet spot is in the €30-70 million range whether it’s a single asset or portfolio of assets. We have financed sub €1 million assets but only as part of a roll-up strategy,” says Benkirane.
Assets offering the return potential that RoundShield seeks are often found in out of favour industries, and currently in mid-2021 leisure and travel related sectors are throwing up some interesting situations. They include retail, offices, restaurants and hotels, as well as staycation plays such as caravan parks.
Some of the most contrarian investments in 2021 could be in sectors that many investors exclude for ESG reasons. These are also off limits for RoundShield, which adheres to a restricted investment list. “We exclude producing or trading in tobacco and related products, pornography, financing of the production of and trade in weapons and ammunition and businesses that derive more than 10% of revenues from the extraction of fossil fuels,” says Benkirane.
ESG goes well beyond exclusions and can also be a source of positive impact, especially in real estate related deals. “We are very focused on energy efficiency because it is good for the environment and good for P&L’s. More often than not a sound ESG policy is also beneficial to returns,” says Benkirane. Beyond the ‘E’ (environmental) in ESG, the ‘S’ (social) is also relevant for social housing, nursing homes and supported living. RoundShield has in 2021 raised EUR 210 million for its first real estate private equity fund, the Irish Social Housing Fund, which will develop social housing in Ireland.
The reasons for borrowers seeking finance could include a bridge to recovery, acquisitions, and sometimes very carefully selected distressed deals. “We are a majority investor but the distressed deals we look at are in the private markets and typically single assets or small portfolios without too much granularity. Workouts can be very quick in the UK (4 to 8-week pre-packs) to 24+ months in some of the southern European jurisdictions. Given we generally finance asset-level SPVs without employees and added layers of complexity, enforcement tends to be a bit more straightforward than in large corporate situations.” Workout processes draw on RoundShield’s strong bench of internal bankruptcy and administration expertise, with staff having worked for leading firms such as Duff & Phelps, Grant Thornton, McGrath Nicol, SV Partners Insolvency, Pepper Asset Servicing and Fitzwilliam Loan Management.
RoundShield invests over a one-to-six-year time horizon and the senior partners of the firm have each invested over 18 years through multiple cycles, insolvencies and restructuring processes. In mid-2021, RoundShield sees a compelling opportunity set in Europe for multiple reasons. Latent corporate distress is being temporarily disguised by monetary and fiscal policies that may not continue indefinitely. European banks continue to deleverage, tighten lending criteria, and demonstrate risk aversion. The scale of the opportunity set should not be exaggerated however and may not justify what is perhaps the most over-used word post-Covid, “unprecedented”. “I don’t think it will be the biggest ever distressed pipeline due to the amount of liquidity that’s been created over the last decade and especially over the last 15 months, but I certainly do expect to see attractive pockets of opportunity once government support is tapered,” concludes Benkirane.
RoundShield’s closed end funds have often been more than two or three times oversubscribed. Though the opportunities are found only in Europe, the investor base is predominantly outside Europe. “Approximately 65% of our limited partners are from the US and the balance is split equally between Europe, Asia and the Middle East. The investor base is approximately 80% what is traditionally described as institutional – endowments, foundations, pension funds and insurance companies – and the balance consists primarily of large family offices,” says Kristina Kuhnke Denaro, Head of Investor Relations and Business Development, who is also RoundShield’s internal ambassador for Level 20, which champions women in private equity, as well as being a member of 100 Women in Finance.