When David Mongeau and Piers Talalla left CIBC in 2005 to launch their own investment bank, they set a dubious record. The small new office they leased in London set them back a jaw-dropping £100 a square foot, for an annual outlay of more than $500,000. At the time, no one else had paid more.
But the Canadian duo knew their unknown Avington Financial would need all the help it could get. And the right address was essential.
The best option was Mayfair, a posh West London neighbourhood packed with private equity and hedge-fund managers, where shops are as likely to offer leases for mega-yachts as stupidly expensive coffee, and where rents for small flats can set you back £2,000 ($3,440). That's per week. One private Mayfair restaurant charges €125 ($198) for a single bowl of white truffle pasta.
The address seems to have helped. In 2006, Avington, whose specialty is hospitality deals, was second in a Bloomberg ranking of global hospitality M&A advisers and counted Terra Firma Capital, one of the world's biggest private equity funds, among its clients. A year later Avington was ranked a still respectable seventh, just behind Merrill Lynch. Not bad for a firm with only two partners and a small number of professional and support staff in an apartment-size office on Curzon Street.
This year Avington is making Mayfair's moneyed mob take notice again.
Mr. Mongeau, 53, who is chairman, and Mr. Talalla, 45, CEO, are in effect calling the bottom of the roughed-up luxury hotels market by launching a hotel buyout fund called Avingstone, aimed at acquiring big hotel properties in Europe. By last week they had raised €310-million. Their target is €500-million.
Avingstone's move is daring. Its founders know a thing or two about the advice industry and have the personal wealth to prove it: Mr. Mongeau commutes to London from his home in Monaco and squeezes his lanky 6-foot-6 frame into a Ferrari 360, while Mr. Talalla owns a 1936 Bentley. But they have never run a fund and their timing could be off. Maybe the hotel market has not reached bottom. If the recovery stalls out, as Britain's seems to be doing, hotel values - down as much as 40 per cent since the recession started - could plunge again.
If they're wrong, some of the savviest guys in the real estate business will be wrong with them. The fund's lead investors are the publicity-shy English brothers Ian and Richard Livingstone whose London & Regional Properties is one of Europe's largest private real estate companies. Their €9-billion portfolio includes more than 50 upscale hotels, among them Hilton Park Lane and Hilton Trafalgar Square, both in London. Other Avingstone investors include a southeast Asian sovereign wealth fund and "a couple of dynastic European families," Mr. Mongeau says. He and Mr. Talalla are contributing considerable dollops of their own money, but won't say how much.
They are boosting the appeal of the fund by putting its biggest investors on the investment committee and charging the industry standard 2-per-cent asset management fee once deals are done. Most other funds charge the fee before the money is even invested.
Why now? Because hotel values dependably rise and fall with GDP rates, though at amplified levels. If you believe GDP is more likely to rise than fall, as the investors in the new Avingstone expect, now is the time to load the buyout gun.
A small number of other fund managers agree. Christopher Voutsinas, the head of acquisitions at Heitman, a property investment management firm in London, is launching a €505-million European commercial property fund. "We're close to the bottom," he says. "David Mongeau is confident and has a lot of international experience. He knows it's better to be a bit early than a bit late."
Messrs. Mongeau and Talalla expect a slew of hotel properties to hit the market in the next couple of years, creating a potential shopping bonanza.
The boom years, 2005 through 2007, saw some $75-billion (U.S.) worth of hotel deals in Europe, the Middle East and Africa, according to Jones Lang LaSalle, the global real estate consulting and management firm. The high-water mark came in mid-2007, when Blackstone Group, one of the biggest U.S. private equity firms, paid $26.7-billion for Hilton Hotels.
Last year's deal value shrank to $12-billion. The pace is widely expected to fall even more this year. The bounce back, if it comes, might be triggered by anxiety-ridden bankers. The buyout frenzy that ended two years ago was fuelled by cheap borrowing costs and high leverage. Some of the hotel investors are now struggling to pay the debts and face foreclosure. "Because hotels are so overleveraged, banks may force them to sell," Mr. Mongeau says.
This is where Avingstone would come in. The fund could offer to buy individual hotels, a hotel portfolio, or form a joint venture with the lenders to co-own, manage and reposition the properties. Because the debt markets remain largely closed, the fund would pay 100-per-cent equity, then refinance the deals with debt to boost returns once the lending markets reopen.
Messrs. Mongeau and Talalla are deal junkies who have a lot of experience in the hotel business.
Born and raised in Windsor, Ont., Mr. Mongeau trained as a lawyer and got his first taste of the hotel industry doing legal work for Four Seasons Hotels and Resorts. In 1986, he joined Four Seasons and became the firm's deal man. Seven years later he was offered a job at CIBC World Markets by David Kassie, a high-flying deal maker who founded Genuity Capital Markets after he was ousted from CIBC in 2004.
Mr. Mongeau became vice-chairman of CIBC World Markets and global head of its M&A unit. In 2000, CIBC moved him to London, where he hired Mr. Talalla. Mr. Talalla was born in London, grew up in Canada and California and briefly worked with Mr. Mongeau in Toronto in the mid-1990s before moving on to Citigroup and Dresdner Kleinwort.
They both left CIBC in 2005 when the bank began to retrench. They formed Avington Financial later that year to exploit the relationships they had built in the hotels, hospitality, real estate and food and beverage industries. One of their highest-profile jobs was adviser to Fairmont Hotels & Resorts, which had come under acquisition attack by Carl Icahn. In the end, Fairmont was sold to Colony Capital and Kingdom Hotels International for a plump premium to Mr. Icahn's offer.
The new Avingstone fund is a whole different game. Messrs. Mongeau and Talalla will be investing other people's money for the first time. If the luxury hotel industry revives and they pull off some sweet deals, the Avington-Avingstone combo could become one of Mayfair's hottest boutique investment firms. "We think now is the time to get geared up," Mr. Mongeau says.
If they call the market wrong, however, they'll have to find another way to pay one of the world's highest office rents.
Eric Reguly