Published Date: 2021-06-17 | Source: INCE|Community | Author: The Finance Ghost
If you've never heard of Irongate Group, don't feel too bad.
You've certainly heard of Investec before and possibly the Investec Australia Property Fund. That Australian fund rebranded to the Irongate Group in late 2020 as part of a transaction in which it internalised its management company.
External management companies: how property execs got rich
Back in the day, property funds were structured with management companies (ManCos) sitting externally to the fund. That allowed the management team to charge a percentage-based fee to the fund based on the value of assets, which was a wonderful deal for management teams and a poor deal for shareholders.
Think about every other type of company. The management team earns salaries and bonuses based on specific KPIs, not a fee based on a percentage of assets. Apart from the percentage fee usually costing more than salaries and bonuses, the other issue is alignment. A percentage fee simply encourages the management teams to do more deals rather than the right deals.
Across the JSE, property funds "internalised their ManCos" by paying out the management team based on a negotiated price, referenced to the likely fee income in the short-term. Generally, internalisations were highly lucrative for property management teams that were paid substantial sums to cancel their management agreements. It was a wonderful time to be a property executive.
Since then, the property sector has cooled off, raising money locally is trickier and the ManCo structures are firmly a thing of the past. For management teams as well as investors, it is extremely important to time the market in a journey of wealth creation.
Irongate: an Aussie fund with an Aussie structure
Irongate internalised its ManCo in late 2020 using a stapled unit structure, which is as Australian as the spiders that are big enough to carry you away in the night. Relatively uncommon in the rest of the world, a stapled security is simply the combination of two or more other securities to form a single unit. The underlying securities cannot be bought or sold separately.
In this case, the payment was made to the Investec Group to acquire the management rights of the fund, based on how this specific fund had been set up. To give an idea of the quantum, Investec was paid A$40m which equated to around 3.2% of the total assets under management.
South African demand for offshore property funds remains strong
With the tricky restructuring out of the way, Irongate got back to business with the acquisitions of further properties.
The latest acquisition is a property in Canberra for A$73.75m. The A-grade office building has its anchor tenant (55% of the property) as the Australian National Audit Office and the implied yield for the acquisition is 5.13%.
To fund the acquisition, Irongate launched a capital raise for approximately A$50m at a 3.9% discount to the closing price last week. According to Irongate, that's an implied yield (based on FY22) of 6.2%, which gives an idea of the returns available on an Australian fund.
The money was raised in the form of a fully underwritten accelerated bookbuild on Tuesday. It's a bit odd to do it the day before a public holiday, but the money was raised without any hiccups.
"Fully underwritten" means that even if investors weren't interested, investment banks had been lined up to take up any unissued shares (in exchange for a fee, naturally). This means that the company was guaranteed to raise the required amount.
An "accelerated bookbuild" means that the bankers pick up the phones to their institutional clients and offer the shares. The clients indicate a level of interest and the book is built accordingly. Once the full amount is raised, the book closes and the allocations are made.
This is not the same as an offer to the public, which is why the regulatory process is so much smoother. Only qualifying investors are included in the capital raise and the disclosure burden for the company is a fraction of what it would be otherwise.
The company announced by 2pm that the bookbuild was closed and the full amount had been raised. Even when many people were on leave on Tuesday, there was clearly enough investor interest to pull together A$50m (approximately R530m).