Investor Profile: Davidson Kempner’s ‘patient capital’ builds in Portugal

While real estate is often a long game, buying properties needn’t be. Yet for those firms with particularly “patient capital”, like New York-headquartered Davidson Kempner Capital Management, the rewards are often great from structuring drawn-out, complex deals and extrapolating assets mired in distress.

The firm has recently struck again in Portugal, acquiring a major property portfolio including a slate of prestigious hotels, over three years after securing a heavily discounted package of loans relating to the fallout from the country’s sovereign debt crisis of 2011.  

The latest deal, including the takeover of ECS Capital, a Portuguese venture capital fund manager, brings with it two restructuring funds managed by ECS and some 65 assets in the hospitality, residential and commercial space predominantly located across the Algarve region, according to a release from Davidson Kempner. “It involved a lot of time and patience,” confirms a source with knowledge of the transaction, which took two years from bid to closure.

The ECS real estate portfolio includes 18 hotels and three golf courses, as well as residential properties and land to develop at the Vale do Lobo Golf & Beach Resort plus the Conrad Algarve Hotel in Quinta do Lago, Davidson Kempner said. The fund’s hotel units were managed by NAU to date, an operator created by ECS in 2018, which was Portugal’s 12th biggest hotel group in 2019 with 3,778 keys, according to Deloitte’s Portuguese Hospitality Atlas. ECS has more than €1 billion in assets under management in total and was founded by the former governor of the Bank of Portugal António de Sousa and Fernando Esmeraldo.

Inside Project Crow

To arrive at those assets, Davidson Kempner had to play “a game of chess” to acquire the so-called Project Crow from a group of Portuguese banks in a deal that closed at around €850 million, marking reportedly the largest ever real estate portfolio acquisition in Portugal. The total haul is understood to include some 21 hotels, five golf courses, properties for future development, logistics platforms and a shopping centre, according to details released by law firm PLMJ, which said it had 16 lawyers working on the deal. The two funds were domiciled in Luxembourg and Portugal respectively, adding to the complexity.

Project Crow began in January 2021, with Davidson Kempner European Partners and its legal teams PLMJ and Clifford Chance submitting bids to be taken into consideration, and once selected, negotiating the acquisition with the various entities involved. Five banks were exposed to the assets, including Portugal’s Novo Banco, the new face of bad bank Banco Espirito Santo (BES), BCP, CGD, Santander and Oitante, the vehicle that took over the toxic assets of Banif at the time of its resolution. Linklaters and Morais Leitão acted for the banks. Other asset management firms, including Bain / Cerberus and Oaktree, are understood to have dropped out of the race.

The acquisitions consortium also includes operating partners Kronos and Los Angeles-based real estate investment and hospitality management company Highgate. Highgate has recently made other moves in Portugal as part of its deal for Viceroy Hotels & Resorts, a 10-asset hotel brand which has further properties in the pipeline in Portugal and Panama.

Davidson Kempner's Portfolio

Property types #Props Est value ($m) % Total
Apartment 40 $222 4%
Office 32 $932 19%
Industrial 27 $639 13%
Retail 21 $444 9%
Senior Housing 14 $161 3%
Hotel 26 $1,527 31%
Dev Site 1 $32 1%
Other 370 $429 9%
Parking 88 $616 12%
Total 619 $5,001 100%
(Source: MSCI Real Capital Analytics)

Many hospitality investors have returned to Portugal  post-Covid, confirms Stephan Reichelt, managing director, head of Spain & Portugal at consultants PKF Hospitality. “Portugal’s leisure properties have recovered much faster than city hotels,” he notes. “The key destinations are the two main hubs – Porto and Lisbon – although the Algarve remains very interesting as it’s secure, climate safe and has long attracted British and German tourists. Meanwhile, the Iberian Peninsula as a whole is a major holiday choice for its well-connected hubs including Barcelona and Malaga. In a post-Covid world of remote work, it’s attractive to northern European professionals looking for short-term relocation. 

“Portugal has an additional draw for international investors thanks to its Golden Visa programme, whereby individuals can eventually gain EU citizenship through relatively modest investment initiatives.”

The benefits of ‘being boring’

Bloomberg quotes a competitor as describing Davidson Kempner’s brand as “being boring”, but the firm’s ability to outwit faster, more risk-tolerant firms has served this proverbial tortoise well. While avoiding leverage, the firm is primarily known for investing in merger arbitrage, bankruptcy and restructuring situations. Bloomberg reports that its flagship fund has returned 7% annualised over the past two decades and the firm has generated $19.6 billion for its investors since the early eighties.

The hedge fund manager was founded in 1983 by Marvin Davidson, a former chief of the risk arbitrage and convertible securities departments at Bear Stearns, ostensibly to manage Davidson’s retirement pot. Thomas Kempner joined him in 1984 after having traded high yield and distressed securities at First City Capital Corporation. In 1987, the firm started taking outside capital and expanded globally in successive years, adding offices in London, Hong Kong, Dublin, Philadelphia, Shenzhen and Mumbai.

The latest deal in Portugal follows Davidson Kempner’s acquisition of the Nata 2 portfolio in 2019 from Novo Banco, a deal which attracted controversy. Comprising a portfolio of NPLs with a gross value of €3.3 billion, the loans were reportedly sold at a discount to face value of around 90%, bringing the price tag down to around €330 million. While some of the loans were described as “extremely difficult to recover”, Novo Banco came under media criticism for generating what would have been significant losses above existing impairments, requiring further injections of capital from Portugal’s Resolution Fund. Whenever the bank’s capital ratio falls below 12.5%, the Resolution Fund has to top it up, as per a contingent capital agreement signed with Lone Star in 2017, when it acquired 75% of the equity of Novo Banco from the Resolution Fund for €750 million.

[Novo Banco was created  in 2014 to take over the ‘good’ assets and client base of BES, after the separation of its toxic assets in the wake of the sovereign debt crisis of 2011 when the Portuguese state became BES’ sole shareholder.]

Still, whatever the weather, it has become clear that Davidson Kempner has an affinity for Portugal, and by all accounts, isn’t averse to getting up early to nab the best spot by the pool. Elsewhere, the firm recently upped its stake in Playa Hotels & Resorts, a US company with resorts in Mexico and the Caribbean to around 10%, as it builds on the sector’s outlook.