Polygon’s Griffith Sees Opportunities in Spanish Real Estate

Polygon Global Partners is seeing opportunities in Spain amid its economic recovery as well as in Europe’s banking sector, according to Reade Griffith, who manages the London-based firm’s European equity strategy.

Polygon, which is owned by Tetragon Financial, was founded by Griffith and Paddy Dear in 2002.

Griffith was interviewed by Melissa Karsh on June 26 and Aug. 14. His comments have been edited and condensed for clarity.

Give me some background on the firm’s strategy.

Our focus is to have a series of capacity constrained hedge funds that specialize in specific niches and can seek out unique, interesting opportunities. The Polygon European Equity Strategy has just under $1 billion of capital, focusing on European events. Our sweet spot is looking for companies that typically have a $500 million to $5 billion market capitalization. We’re looking for that mid-market space, which is a little less picked over and less well covered from a research perspective.

How are you investing in Europe?

To use a baseball analogy, Europe may be in the second or third inning. Depending on how successful Donald Trump and his administration is, the U.S. is somewhere in the seventh to ninth inning of the game. So, margins in Europe have further to expand. The recovery in Europe has just been taking hold. Coming from the end of last year to the beginning of this year, you’re starting to see real earnings growth from European companies. In fact, the first quarter was the best in the last 10 to 15 years in Europe from an earnings-growth perspective. Even post-first quarter, the background in Europe has become more stable as the election and political environment has stabilized.

Are any specific countries especially attractive?

In that periphery of Europe, we identified Spain as the market we like best for speed of recovery. Within that, we thought the real-estate sector in Spain had corrected particularly hard. Part of it was companies were overlevered, but also lease lengths tend to be quite short. Then, we found a couple of stocks in the market we thought had potential to re-rate as they fix their balance sheets. One was Inmobiliaria Colonial, which had a very large amount of debt relative to its market cap. It converted that into equity, shareholders supported it and the stock has done extremely well since then. The other similar one is Realia Business, which has just recently finished a series of capital raisings to fix its balance sheet. It has also just completed extending its debt and now has a slightly under-levered to appropriately-levered balance sheet. It can now go out and develop some of the real estate assets on its balance sheet, particularly residential.

Is there a specific company you like?

Post the financial crisis, we identified Evry as an interesting company that had a very strong market position, primarily in Nordic financial services software and systems, but had margins at half the levels of its peers. As over 70% of the shares were held by government-connected financial investors, it also suffered from poor share liquidity and therefore traded at a significant discount to peer cash flow multiples. The combination of low liquidity and low margin had the stock trading at a very low value relative to its potential. When Apax came in with an opportunistic bid in the fall of 2014, we led a campaign to highlight the inadequacy of their offer and to avoid a delisting, which failed. But, we increased our shares and did not sell. Less than two years post their ultimate success in delisting the stock, they have relisted the shares at more than three times the value in which they took them private.

What about a specific sector?

One sector where you are seeing a lot of restructuring activity in Europe right now is the banking sector. We are seeing a lot of banks still looking to repair balance sheets from the financial crisis, such as what we’ve seen recently with some of the Italian banks. While we’re not invested in those banks, because they are private, we are invested in two of the four Greek banks and a Portuguese bank. We are long those banks versus being short other European banks. So we do have two or three names in the portfolio that are hedged with names that are more fully priced by the market. People are now looking around in Italy, thinking this will help the whole country if they get these banks recapitalized and fixed because they can go out and lend credit and it takes away some of the tail risks around the recovery story there. So, that’s quite an important theme for us.

What other themes are you seeing in Europe as it recovers?

Things that we would call off the run. That means something not quite big enough to be in an index — so maybe it’s just outside of the mid-cap index in Germany or the U.K. or some other market — but it’s fast growing, it has a high-quality management team, the company is doing some things to highlight value and we think it’s going to move from being not well covered to something that’s extremely well covered and should make it in that index. It can make it in that index through M&A or through organic growth. So, finding things that will pop on people’s radar screens as being more investable because the research coverage will increase can also be an interesting place to find opportunities.The other area that is attractive right now are these stakebuilding transactions: i.e. a competitor buying a stake in another competitor because he or she sees the business momentum in the industry. That’s often a good indicator of where to look; where there may either be a takeover bid or corporate activity. It’s the same thing with large shareholders increasing stakes in companies. That signals that the company looks attractive.

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