Phase 1 Challenge: No Visibility over Ambitious Real Estate Project:
Client managed a €15 million investment obo a Family Office (SFO client) who had acquired a 25% interest in real estate SPV developing a luxury resort including a hotel and conference centre in Europe (Luxury Resort Project). The Luxury Resort Project was a prestige project conceived prior to the credit crunch and was with hindsight overly ambitious. The Client (and their SFO client) were concerned because the Luxury Resort Project was over budget and had missed a key development milestone, and the SPV required investors to inject significant additional funding. The other 75% of the SPV was controlled by property development company (JV Partner) had full control over management of the Luxury Resort Project and declined to review the business plan, or provide sufficient details on the cost and time overruns. The JV Partner was funded by another Family Office (JV SFO) with security over the property portfolio of the JV Partner.
Lawyers acting for the AM opined the Share Purchase Agreement (SPA) for the 25% interest did not offer any way to gain management control, compel the JV partner to buy back the 25% interest, and provided an uncertain path to exit via sale to a third party. Lawyers confirmed their contractual right to conduct further detailed due diligence (DD) after the key milestone was missed.
Phase 1 Action:
DD Findings:
- Feasibility studies for the Luxury Resort Project were judged to be flawed, and needed to be updated for the changing market environment, there was rising local resistance to the project, and prospective luxury hotel Operators who reviewed the plans opined they would need to be substantially revised to win their support.
- The Luxury Resort Project remained an ego project for the JV Partner, and he was resisting any review the business plan and was very defensive of his direct management control.
- The JV Partner was concealing significant liquidity problems, and had already held discreet talks with the JV SFO. The JV SFO backing the JV Partner had agreed to refinance the JV Partner in return for direct control of key assets, but taking a long view of the difficulties of European Real Estate market, had also instructed the JV Partner to radically reduce staff and suspended all development projects to ride out the adverse market.
Phase 2 Challenge:
The Client (and their SFO client) decided that the Luxury Resort Project no longer suited their time horizon or risk appetite, and wanted a solution that enabled them to take direct control, or to engineer an exit.
Action:
- Rubus exploited the body of date plus the further intelligence insights to develop a decision tree showing the causal chain from the current position to each of the possible outcomes, and then strategies of carrots and sticks to enable the AM to influence the decisions of the JV SFO, to compel the JV Partner to reach our most favoured outcome.
- Carrot: Knowing that the JV Partner did not have the funds to buy out our Client, we wished to make it easier for them fund the buy-out via and asset swap. Rubus evaluated intelligence on their property portfolio to select the property favourable for an asset swap (non-core to the JV Partner, with a valuation close to the valuation of the 25% interest in the SPV for the Luxury Resort Project).
- Stick: The lawyers had flagged that the SPA did not offer a way to compel an exit, but given the JV Partners inability or unwillingness to reach agreed milestones, the SPA did provide grounds for a legal dispute. The SPV project was a high profile prestige project, and intelligence indicated that the JV SFO were very publicity shy, they did not want their ultimate beneficial interest in the Luxury Resort Project to be made public, and certainly did not want to linked to any disputes related to the project.
- Rubus managed the procurement and briefing of lawyers to commence litigation under the SPA, and secured three sperate valuations of the candidate property identified for the asset swap in a third country.
- As anticipated, rather than draw JV SFO into the dispute, the JV Partner agreed to buy out the Client, making payment by way of asset swap.
- Rubus procured the lawyers to draw up the new SPA to exit the SPV, and further lawyers in the third jurisdiction to arrange the transfer of the property used in the asset swap.
Outcome:
AM was able to exit their minority interest in the SPV at an agreed valuation of €17.5 million, and were able to salvage a positive relationship with the JV Partner. The JV Partner and JVSFO, who had a greater risk appetite and longer investment horizons, got to retain control of the prestige project in Switzerland, and avoid adverse media. The AM and the JV Partner agreed to co-developed the asset swapped property, allowing both participate in the profit.
