Victor Khosla always wanted to work on Wall Street. 

When Citibank was launching its distressed debt business in 1991, he was the first one to raise his hand to create a business plan for it. At the age of 33 and, by his own admission, with no prior experience in trading, he found himself navigating the complexities of buying and selling distressed debt. 

It turned out he was born for the industry. In the years that followed, Khosla built and managed one of the top distressed proprietary trading businesses at Merrill Lynch, served as president of Cerberus Capital, and ran MooreSVP, a JV with Moore Capital.

He founded Strategic Value Partners in 2001, and the firm now has €18 billion of assets under management.

He has worked through upturns, downtowns, booms and busts. And now, he believes his industry is on the cusp of a major opportunity.

In an in-depth interview with a restructuring journal last November, he argued that while the market might look serene, especially with the dramatic recent pullback in rates and corresponding rally in risk assets, underneath it was actually “much tougher than it looks”.

“In our view, we are going to wake up 18 months from now, whether we’ve had a full-blown recession or soft landing, in just a slog, a bog: low GDP growth, higher rates, maturity wall, higher defaults. However, the opportunistic credit business is going to get quite a lift. We believe 2024 will provide a multi-year opportunity in credit that is bigger than anything seen since 2008,” he told Turnaround & Workouts.

That opportunity has led him to Dublin and a bricks-and-mortar investment in Irish retail property.

Last week, three months after The Irish Times first revealed its interest, Bloomberg reported that SVP had agreed to buy Blanchardstown Centre from Goldman Sachs. 

On the face of it, it is easy to see what attracted Khosla and SVP to the Dublin shopping mall. 

At the end of March 2022, the national vacancy rate in the shopping centres covered by MSCI in its Irish index was 15.3 per cent. Fast forward two years and the number had fallen to 2.8 per cent. 

And Blanchardstown is doing better than others. 

Blanchardstown Centre is operating at close to full occupancy, and footfall levels at the shopping centre are reaching all-time highs. Shopping centre asset manager Falcon AM reported record levels of footfall at the centre for May 2024. Blanchardstown has witnessed a number of new openings recently, including FatFace, Salsa Jeans and Bperfect Cosmetics. 

However, Khosla is buying an asset in what has been a declining market.

CBRE estimates the slump in prime shopping centre values in the past two years has pushed rental yields of shopping centres near the M50 up 30 per cent, from 6.5 per cent to 8.5 per cent. Like in the bond markets, yields move inversely to prices, so these numbers imply a 27 per cent valuation decline if we ignore rental growth.

This is seen in the price being paid for Blanchardstown. 

Goldman purchased the Blanchardstown Centre from the US private equity giant Blackstone for €750 million in December 2020. Blackstone itself paid about €950 million for the shopping centre in 2016.

The price being paid by SVP has not been disclosed, but it has been reported that the fund’s initial bid was between €550 million and €600 million. After the banks that underwrote the purchase take their due, Goldman would take a hefty loss. 

At least the deal sets a floor on the market. Many people in the industry that I have spoken to believe that retail valuations have bottomed out and that, buoyed by strong consumer sentiment, solid lettings and rising footfall, values will now start to increase, albeit slowly.

As of now, there is not enough data to back up that sentiment. 

But we are certainly starting to see more investor interest in the sector.

Last week, as SVP was finalising the Blanchardstown deal, UK firm Hammerson and Pimco Real Estate refinanced a €570 million loan secured against the Dundrum Town Centre. 

The two firms arranged a €350 million non-recourse term loan of up to seven years with lenders Rothesay, BNP Paribas and Deka, with the funding of the remaining €220 million coming from existing cash held in the joint venture and newly issued equity.

The new debt has an all-in interest cost expected to be around 5.5 per cent. 

The deal was welcomed by the market – Hammerson rose 1.2 per cent the day it was revealed – and comes after it booked the equivalent of €327 million of revaluation losses against Irish assets over the past four years.

The loans were due to mature next month, and their refinancing comes just weeks after Hammerson sold its stake in Kildare Village as part of a wider deal to sell its fashion outlets business.  

With the Blanchardstown deal closing and Hammerson securing its refinancing, attention will now turn to The Square shopping centre in Tallaght. 

Eagle Street Partners, the property asset manager founded by two former senior Glenveagh Properties executives, is in talks to acquire the shopping centre from AIB-appointed receivers. The bank has a €140 million exposure to the asset, and it will be interesting to see if it washes its face on the sale. The current indication is that it will not. 

Based on market trends, deal appetite seems to have moved from marquee assets like The Square to smaller regional retail parks. The top three retail transactions by value in the first half of this year were such retail parks.

CBRE estimates that 60 per cent of all investments in retail in the first half of the year were in retail parks, including the sale of Deerpark Retail Park in Co Kerry and the Letterkenny Retail Park in Co Donegal to alternative fund manager Investcorp for €40 million. 

The biggest purchaser in this space are French sociétés civiles de placement immobilier (SCPIs). In the year to date, French funds have accounted for 40 per cent of all retail property transactions, by deal value.

And the market for retail property deals is rising, with CBRE saying retail was the most invested sector in the Irish property market in both the first and second quarters of this year, accounting for 34 per cent of all spending in the first six months of 2024. 

Partly this is a defensive play, with funds looking cautious about the outlook for the office market. But the attraction is also because many retail assets have already been repriced – Blanchardstown, Dundrum and The Square are all cases in point. As BNP Paribas noted in a market report earlier this year, retail property has been subjected to more repricing than logistics or offices where the structural challenge of remote working is more recent.

SVP and Eagle Street are buying because they think the market has bottomed out, and there is room for significant upside. 

According to its website, Strategic Value Partners is a “global investment firm focused on opportunistic credit and private equity opportunities in North America and Europe”.

Clearly, SVP sees both opportunism and value in opportunity in Blanchardstown. 

As an aside, it is well worth reading Thomas’s analysis of the Blanchardstown Centre deal, where he compared the financial outcome of that deal with the sale of Lone Star’s Quintain Development Ireland, along with most of its home-building developments, to fellow US-based private-equity firm TPG.

As Thomas put it: “Over a similar time scale, the valuation of one of Ireland’s most high-profile shopping centres has dropped by a fifth as retail has yet to find a way of rebounding fully from the pandemic. Meanwhile, a residential land bank has enjoyed an estimated doubling in value thanks to the near-certainty that housing demand will continue to outstrip supply for as long as it takes to build thousands of homes.

“The opposite outcomes for Lone Star and Goldman Sachs’s bets illustrate how divergent those strands of the property market have become.”

Elsewhere last week…

Last week, Harland & Wolffe, Belfast’s historic shipyard company, warned investors that it cannot report financial information to them as a going concern and three directors resigned from its board.

Alice visited Belfast to explore what’s going on at Harland & Wolff and what it means for the city.

Stephen Keogh is the best M&A lawyer in Dublin, according to Chambers Global. Now he is gearing up to lead William Fry as managing partner. He spoke to Francesca about growth, deal value, and how to push the firm to the next level.

A new tax appeal judgment gives an insight into the latest of many attempts by Revenue to claw back hundreds of millions of euro wrongfully claimed under pandemic support schemes. Niall had the story. 

Paul McGlade, who died in recent days, was a consummate retailer with an instinct for knowing what to buy and how to sell it. His story, while relatively little known, is one of the all-time greats of modern Irish business. Tom spoke to his family and reported on his life and times, and his legacy.