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Buy-out/Buy-in: what it is, and why the time is ripe for this practice in the real estate sector

11.05.2021

Real estate sector operators are accustomed to the concept of extraordinary business transactions, as in most cases real estate investments are made with intense corporate activities. And, since the late 1990s, when the real estate market began to work with finance rules, many acronyms that were unknown until that time have been used in the sector.

This article aims to offer a brief insight to readers on what characterizes the complex world of financial and corporate instruments, learning about a practice that Morning Capital has chosen as the key element of its own growth strategy: Buy-out and Buy-in operations.

But first things first.

Very often we try hard not to use neologisms or words stolen from the English language, aiming to make the most of the extraordinary wealth (and beauty) of the huge Italian vocabulary. But in this case, we are doing just the opposite.

The acronyms of real estate finance

In the introduction, we mentioned the event that in Italy allowed the real estate sector to enter the financial Capital Market. This happened through the intervention of the large Merchant banks in the sector.

In the late 1990s, we began to use acronyms to indicate the instruments used to finalize real estate investments in the various forms required by the objectives planned in advance by investors:

  • SPV (Special Purpose Vehicle),
  • NewCo (New Company),
  • HoldCo (Holding Company),
  • PropCo (Property Company),
  • Reit (Real Estate Investment Trust) at international level,
  • SIIQ (Società di Investimento Immobiliare Quotate - Listed Real Estate Investment Companies) at national level,
  • Real Estate Investment Funds - closed and open, managed by international or Italian asset management companies - AMC (SGR - Società di Gestione del risparmio, in Italian),
  • OICR (Organismi di Investimento Collettivo del Risparmio), known in English as UCITS, “undertakings for the collective investment in transferable securities”.
  • SICAV/SICAF (Società di Investimento a Capitale Variabile o Fisso - Investment Company with Variable or Fixed Capital),

Securitization, Asset Class … are just some of the acronyms and most common terms used in real estate finance transactions.

In addition to these are the most common terms used in Corporate operations (i.e., in the business world):

  • M&A (Mergers & Acquisitions),
  • Mergers,
  • Incorporations,
  • Transfers, Business Units,
  • Buy-outs …

And here we come to the reference that interests us.

What do we mean by Buy-out and Buy-in?

Buy-out is a company purchase transaction in which the company managers (generally defined as the management team) become managers/entrepreneurs.

When the acquisition takes place only with the financial means paid by the management team is defined an MBO (Management Buy-Out), when, on the other hand, there is a capital contribution from third parties (typically from (i) investment funds or (ii) the banking system) it is called an LBO (Leveraged Buy-Out).

In fact, these transactions are frequently carried out by a management team outside the company being acquired, in this case it is more correct to use the term MBI (Management Buy-In).

This article will not go into detail on any of the many other forms of acquisitions, but will look at the reasons for this practice and, in particular, the reasons why Morning Capital deems this to be the best solution possible for increasing the value of real estate assets for investors, and indeed has made it the first strategic priority for its own growth.

Why opt for Buy-out operations in the real estate sector?

The case of Vittoria Assicurazioni has confirmed the worthiness of the initial project strategy. The rapid improvement in economic and financial indexes, savings on running costs, the greater value of the managed assets, the vertical skills, which help to program using predictive planning methods, the organizational benefits, are just some of the elements which, data in hand, confirm the undisputed value of this practice, on which the following focus is based.

Many corporate categories set aside part of their profits to real estate investments:

  • insurance companies,
  • banks,
  • financial and operational holdings,
  • social security institutions,
  • industrial entities, even private undertakings, from small businesses to Family office or the HNWI (High Net Worth Individual).

In most cases, investments are not represented by instrumental assets, thus linked to the core business, but are classified as non-core financial assets.

When

  • the volume of the fund invested in real estate reaches a certain amount or
  • (ii) the complexity of the assets in which the investment is made starts to represent a distorting factor in relation to the core business,

it is both opportune and fully useful to apply a dynamic management able to maximize the value of the property and minimize the related risks, based on predictive investment logics with (i) the analysis of the data trends related to historical series and (ii) the ability to predict future scenarios, based on the analysis of social and sociological behavior and the interpretation of macro- and micro-economic factors.

These characteristics are not typically found in traditional real estate management teams in the companies mentioned above. Procuring them directly would become a tough and expensive procedure, and in most cases would not be economically viable.

Buy-out and Buy-in: the benefits

And here, Buy-out (Buy-in) can become the solution to the ‘problem’: identifying professionals with these skills, with ready-made teams, who can take over the management process by (i) acquiring dedicated human resources and (ii) signing medium-long term contracts with highly challenging strategic objectives.

When the management team is already a company, shares in the vehicle containing the whole work force and everything linked to this are purchased, in the case of an internal division of a larger company, a business unit to be purchased wholly or partly is identified, depending on the strategy of the selling company.

The positive effects of the Buy-out (Buy-in) are seen immediately in the first financial year following the acquisition, in the form of:

  • reduced costs;
  • improved portfolio performance;
  • dynamic management of the assets;
  • improved economic and asset planning and
  • better and more flexible management of the treasury deriving from the core business.

Morning Capital aims to implement a Buy-out every two years, as the financial year following the year of acquisition is devoted to consolidating the integration, with intense change management actions, coordinated activities overseen by one of the most competent teams on the national scenario.

New era in the real estate world.  Stronger, everyday.

 

Article by Maurizio Monteverdi, CEO of Morning Capital

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