Navigating operational real estate and lending in the private equity landscape

In the dynamic world of private equity (PE), operational real estate plays a vital role in creating value and driving growth for PE-backed businesses. The integration of operational real estate and lending strategies has emerged as a powerful tool for enhancing a company's performance and generating attractive returns. This article delves into the synergies between operational real estate and lending in the context of PE-backed businesses, highlighting their significance and potential rewards.

Understanding operational real estate

Operational real estate refers to properties that are used for business operations rather than purely as investments – for example, the OakNorth offices I usually work out of in Soho, London. These properties serve as the foundation for a company's core activities and play a pivotal role in influencing operational efficiency, employee productivity, customer experience, and overall performance. In the context of PE, operational real estate is leveraged as a strategic asset to enhance a business' value proposition.

The convergence of operational real estate and PE

Integrating operational real estate strategies into the investment process allows PE firms to unlock hidden value by aligning real estate assets with the business' strategic goals. By owning and controlling the operational real estate, PE firms can:

Enhance operational efficiency: Customised and well-designed real estate can lead to streamlined operations and improved workflow, ultimately leading to increased productivity and reduced costs.

Flexibility and adaptability: Owning operational real estate provides businesses with the flexibility to adapt to changing market conditions and operational needs, allowing for expansion, contraction, or reconfiguration of space as required. An example that comes to mind is a loan I worked on during the pandemic with a family-run hotel in South Kensington. It was the Summer of 2020, so the UK had been under lockdown for several months. The hotel decided to use the lockdown as an opportunity to redecorate its 30 bedrooms and add another five, refit its bathrooms, and make repairs to the roof and front exterior, without having to disturb hotel guests. The renovations put the business in a strong position to accommodate a larger number of guests once the country re-opened and there was a boom in staycations due to international travel still being limited.

Tailored customer experience: Real estate can play a critical role in shaping the customer experience. Businesses can design spaces that align with their brand image and provide an optimal environment for customer engagement. Earlier this year, I led on a transaction with Exemplar Health Care to support the development of new care homes across the UK. The business opened its first complex needs care home in 2003, and now employs 2,700 staff members across 44 care homes. It’s invested in designing and developing care homes for adults living with a range of complex and high acuity needs, including neuro-disability, brain injury, spinal injury, stroke, mental ill-health, physical disability, learning disability and/or autism and complex dementia. It is able to make these customers lives more comfortable in part thanks to the investments it’s made in its real estate, ensuring homes are fit for purpose.

Long-Term value creation: Properly managed operational real estate can create long-term value, as improvements and investments made in the property can lead to appreciation and enhanced equity.

The Role of lending in the equation

Lending to PE-backed businesses involves providing capital to support their growth initiatives, operational improvements, and expansion strategies. Integrating lending with operational real estate strategies can offer several advantages:

Holistic funding: Combining operational real estate and lending allows businesses to secure the capital they need not only for day-to-day operations but also for real estate-related investments that align with their growth plans. One of the businesses that we’ve worked with for several years is The Heartwood Collection which is backed by PE-firm, Alchemy Partners. It’s grown to 14 restaurants and 20 pubs in and around the M25, and recently raised £100 million of new funding (50% of which came from OakNorth and 50% from Alchemy) for a push to open more pubs and build hotel rooms to go with them.

Risk mitigation: Owning real estate can act as collateral, reducing the lender's risk and potentially leading to more favourable lending terms for the business. While we’ll consider other types of collateral at OakNorth such as stock, debtors, plant and machinery, and do unsecured lending based on cash flow, the majority of businesses we lend to have some form of real estate to offer as collateral which helps make things much easier.

Strategic investments: Lending can support businesses in making strategic real estate investments, such as acquiring new properties, renovating existing ones, or expanding into new markets. One of the businesses we’ve supported for several years now in this regard is Z Hotels - the business has been an OakNorth customer for several years, initially securing bespoke funding from us in 2018 to launch two new sites in London. The most recent facility we did with the business earlier this year will fund the construction of an additional 20 rooms at one of its central London hotels, and enable it to add lift facilities and a new ground floor café. These investments will not only enable the business to accommodate a larger number of guests, but also provide them with an even better experience.

Financial flexibility: A well-structured lending arrangement can provide businesses with the financial flexibility needed to seize growth opportunities without compromising their operational stability. 

Operational real estate and lending are integral components of the private equity landscape, providing businesses with the tools they need to optimise operations, enhance customer experiences, and drive growth. The strategic integration of operational real estate and lending strategies requires a deep understanding of both the business' operational needs and the complexities of real estate markets. When executed effectively, this synergy has the potential to create significant value for PE-backed businesses, their investors, and their stakeholders.