Location, location, location: many private equity firms are looking for new office space as they expand
It’s not because buyout firms don’t like the clubs or the area. It’s because many private equity firms are being forced to look beyond their traditional stomping ground because they have outgrown their current office space.
Many private equity firms now require bigger offices because they are hiring bigger teams after a bumper few years for fundraising. But they are finding that space is hard to come by in the crowded Mayfair district.
The Carlyle Group is one such firm that is moving out of the area. The firm has agreed to take on around 63,000 square feet in London’s St James’s – the development has a 40% larger floor plate than Carlyle’s current base in London’s Berkeley Square. Ontario Teachers‘ Pension Plan moved out of Mayfair and over to Portman Square, north of Oxford Street, when it made its move in 2015 – taking on more space in the process.
“The established ones are growing,” he said. “We’ve seen a number of clients telling us they are growing or they can see themselves growing and they’ll need more space. It’s all positive news.”
Overall, 21 private equity firms took new office space of around 337,000 sq ft in London in 2015 – the highest number of moves and total amount of space taken by private equity firms in the capital on record, according to research by Cushman & Wakefield for Financial News. The offices were larger than in previous years, with firms taking on about 16,000 sq ft on average in 2015, compared to an average of 10,500 across the previous eight years. And 2016 looks like it will be another strong, although not record-breaking, year. By mid-June, private equity firms had taken on about 69,000 sq ft of new office space in London – around 13,800 sq ft on average.
The larger offices are in part driven by fundraising and also firms getting into new business lines, such as private debt and special situations.
Private equity firms have had a record few years for raising cash, and those bigger funds usually mean that private equity firms have to increase the size of their team to help them spend their money. Europe-focused funds raised an aggregate €128 billion in 2015 – the highest level since 2007, according to data provider Preqin. The size of the average fund also increased, from €404 million in 2014 to €594 million in 2015.
Charlie Hunt, a principal consultant at Private Equity Recruitment, estimates that there are around 6,000 people working in private equity in London. He said that many firms were in expansion mode, partly because they were raising bigger funds, so needed more staff to either complete a higher number of deals or bigger transactions.
“The funds that are growing are hiring more people,” he said. “You need more people to do the bigger deals because you are going into just more complexity on the bigger transactions. So you may have teams of people just doing the banking, or just doing the insurance, etc.”
Robert Swift, a partner at mid-market firm Stirling Square, said that his firm was moving to bigger offices in Chelsea because “the team has grown since the final close of our third fund” – a €600 million vehicle that closed in January. A person close to Advent said that the firm was moving to the Nova South development in Victoria because it had a break clause on its current building in Victoria and it had also increased the number of staff in its office. A person familiar with Oaktree Capital said that the firm was moving in to a 38,000 sq ft development in the Verde development in Victoria from its current base in Knightsbridge because the firm had expanded in recent years.
The demand for bigger space is compounded by the fact that private equity firms typically take up more space than their peers in other sectors of financial services. A private equity firm will usually budget to have about 120 sq ft per person, whereas a typical hedge fund would budget for about 100 sq ft per person, according to property consultants. That’s because senior executives in private equity firms often like having their own private office, with junior staff members either working in open plan or sharing offices. They also tend to need more space for meeting rooms to accommodate lawyers, bankers and management teams when a deal is getting done.
Alongside the demand for more space, property consultants report that buyout firms typically want offices with roof terraces, natural light and all their staff on one floor. Such demands are difficult to accommodate in crowded Mayfair, where many buildings are former residential buildings that have been converted into offices.
Knight Frank’s Fairweather said: “Natural light is key. They are not so much like hedge funds, which are more open plan. They are needing more private offices and they want to be on less floors.”
One of the most popular areas for private equity firms seeking a bit more space is nearby St James’s, but Victoria, north of Oxford Street and even Soho – all areas near Mayfair – are now options.
Victoria and North of Oxford Street have the added bonus of being a bit cheaper than Mayfair and St James’s. North of Oxford Street and Victoria locations typically command rents of about £82 per sq ft, compared to about £130 per sq ft for Mayfair and St James’s for newly refurbished offices, according to a report by Carter Jonas in June. For those that are willing to head to Holborn and Bloomsbury, rents fall to about £67 per sq ft and to £65 per sq ft in the City core.
However, property consultants report that private equity firms are not usually worried about the price tag.
Elaine Rossall, head of research at Cushman & Wakefield, said: “Mayfair and St James’s will still always attract a certain kind of financial services company. Property overall is still a very small part of their costs, so they can afford to be in some of those prime locations, but you have seen some of the financial services companies moving to north of Oxford Street and to Victoria.”
One nearby area does appear to be out of bounds. Private equity firms are being squeezed out of Knightsbridge, mainly because many smaller offices have been turned into high-end homes.
Patrick Ryan, a partner at property consultants Levy, said: “The smaller office units have now been switched to residential in Knightsbridge. That has severely reduced the number of options available to small private equity firms in Knightsbridge. There is little or nothing over there.”