Quinlan's exit down to sheer incompatibility of approaches

BUSINESS OPINION:The split shows how the investment manager and its founder dealt so differently with banks

THE PARTING of the ways between Derek Quinlan and the eponymous property investment manager he founded 20 years ago has come as quite a surprise – certainly to those of us on the outside of such things. Like any separation, the whys and wherefores generally depend on which side of the split the person you are talking to happens to fall.

Equally, it must have been very messy given the totemic nature of Derek Quinlan and the draw he was for clients. He is also a significant investor in a number of Quinlan Private deals and presumably, as a partner, owned a chunk of the firm. But the two sides appear to have reached a point where – despite confronting the same problem of falling values and tight credit markets – they have decided to go their separate ways and in, in effect, put a fire break between the two entities.

And one suspects the reason for this is might be they are approaching the problem in different ways.

Quinlan Private is, in effect, an investment manager and is being proactive in working with its banks on what it says are five out of 120 investments that are in difficulty or potentially in difficulty.

Quinlan Private sources say they approached the banks about potential issues, including the loan-to-value ratios, on these projects months ago, and the banks have responded very positively. As a result, they have been able to parley their clients’ willingness to stump up extra cash into better – relatively speaking – terms and conditions. Crucially for the €1.165 billion Jurys Inn deal, this includes a commitment to further expansion, say Quinlan Private sources.

Derek Quinlan personally is reported to be taking a somewhat more robust approach to his bankers. Sources close to him say that his modus operandi is combative, with Quinlan more likely to present the banks with a take-it-or-leave-it solution rather than engage in the sort of protracted “work out” negotiations more commonplace.

It’s a variation of the old “owe the bank a million” adage and an approach pretty much guaranteed to drive bankers demented at the best of times. In Quinlan’s case, his position is bolstered by the quality of the assets he holds, say sources.

There are some indications that Quinlan may have softened his approach recently, hiring a well-known Irish accountant with years of experience in this field, to work with him.

Time will tell if his approach is the correct one but, reading between the lines, his strategy was doing Quinlan Private no favours as it plotted a more conciliatory path with many of the same banks.

It would be a massive overstatement to say that the association had gone from being an asset to a liability for Quinlan Private, but clearly the time had come to put a bit of clear blue water between the two entities.

And there is no getting away from the fact that Quinlan Private has a job on its hands. While the number of deals that require cash calls is relatively small, five out of 120, they include two of the biggest recent deals and are in the hard-pressed hotel sector.

The firm’s portfolio as a whole is heavily exposed to the sector, presumably because hotels with strong cash flow are well-suited to the firm’s model.

Sources close to Quinlan Private point out that nearly every one of their deals is done on a non-recourse basis, meaning that investors in the syndicates behind them can only lose their initial equity investment. If the banks seek fresh equity because of falling loan-to-value ratios or other reasons under the loan agreement, Quinlan Private has the option to simply hand back the keys, although in doing so the firm would in effect be signing its own death warrant.

But pretty much anyone or any institution that bought a commercial property in Ireland in the last few years is facing this sort of “good money after bad” decision, with the outlook for the sector one of zero growth in the short- to medium-term. Most are putting off any decision – in so far as they can – until the establishment of the National Asset Management Agency in the autumn.

To date, Quinlan Private appears to have been able to convince enough of its clients to follow their money. In the cash calls so far, syndicate members have been asked to oversubscribe by approximately 10 per cent, in order to cover the members who simply don’t have the cash and, as a result, will be diluted.

Ultimately, Quinlan Private can look to third party investors to make up the shortfall.

The situation appears to be serious, but not critical. The big imponderable is where are Quinlan Private’s clients getting their extra capital and how much of it is there, because it would be only prudent to presume further cash calls. Something else to be filed under: “What were we all thinking?”