M7 founder lifts the lid on his new shop in first interview since setting up
By David Hatcher
January 19, 2024 – 08:20 GMT
When M7 Real Estate and Richard Croft announced that the co-founder of the business and executive chairman was stepping down last February, it was – more or less – the end of a rollercoaster journey.
Croft and his band of merry men (and women) established M7 at the nadir of the previous cycle, in the depths of the global financial crisis in 2009. Together they grew the business to almost €7bn of assets under management, partnered with Blackstone to help build its €21.5bn Mileway urban logistics platform, and sold out to Oxford Properties in 2021.
Not everything was rosy in the garden, however. The specialist real estate exchange IPSX, which had been backed by Croft and M7, is in the process of being wound down
Although still a senior adviser to M7, Croft is now all-systems-go on his new venture, Martley Capital Group, which was officially launched earlier this month. With its debut deal already under its belt – a £32.5m loan to Tristan Capital – Croft and co are working up a series of new strategies involving co-working, taking stakes in public companies, and providing gap funding to plug the hole that senior banks have vacated.
In his first interview since the launch of Martley, Croft sat down with React News to discuss the “arterial spray” of bloodletting in the market, going against the consensus on regional offices, and why the fractionalisation of real estate is still the future.
What does Martley’s current portfolio look like?
By the end of the month we expect to have around €750m of gross assets under management. That will include a number of mandates taken on that were previously with M7, including the CEE part of the business and the credit business, as well as some other UK mandates.
What new strategies are also included or being pursued?
We are pursuing a gap funding strategy, to provide debt in the gap where senior financing was previously being provided but are now being more conservative.
We are launching a number of new funds including Martley Capital Real Estate Special Opportunities, which will be very small but hyper-liquid. We expect to close that with about £20m this month. It will be a sandbox fund that can do anything – including bridge finance and buying equities – and will be designed to get in and out of opportunities very fast.
“I’ve never been a solo artist. I’ve always tried to be a member of a band”
The world is full of tiny, small assets which are more hassle than they’re worth to a lot of owners, and can be bought at a reasonable discount if you can turn up tomorrow and you have the cash. So, raising £20m makes a lot of sense because you can rotate that money super fast.
We are also raising an opportunistic fund, and have a couple of cornerstone investors lined up to buy assets that we see as being mispriced in the UK and Central Europe.
Regional co-working is also an area we see as a major opportunity, where there are plenty of value propositions available.
How does the gap funding strategy work, and who is backing it?
The gap funding deals will be our bread and butter alongside our existing asset management mandates, and we are closing in on a second deal following on from our recent loan to Tristan.
It’s really focused on the 40% to 60% LTV area of the capital stack, which is the gap between what used to be senior debt and what senior debt is now – essentially a very low-risk mezzanine piece. Our sweet spot ticket size is probably between £30m and £40m, so against assets of between about £150m and £200m.
It is being funded by ultra-high-net-worths and family offices, with individual tickets typically being between £1m and £5m. If people can get a coupon of around 13% for that in exchange for very limited risk, there’s a big market for that.
Regional co-working and office investment goes against popular thinking in many ways. Why are you so bullish?
I believe that co-working is a really important part of the office infrastructure moving forward. I don’t think WeWork got it wrong, I just think it was badly managed.
You’ve got this strange environment at the moment where the regional office investment market is dead but the occupational market is actually quite strong, and the regional co-working market is potentially huge because there’s just not really any provision.
Rather than long leases where you lease long or tie into management contracts, I think there’s an opportunity for us to own both the operating business and the real estate.
You’re starting from a blank sheet of paper, having learnt all the lessons that other people have the hard way over the past 20 or 30 years, at a time when you can buy assets so cheaply.
It will be its own entity and I think it has the capacity to be enormous. I think we can compete with IWG, which has actually moved to become an asset-light model.
We’re out, busy trying to raise money for that. And I’m pretty optimistic that we will and that enough people will think that I’m not a nut. Consensus views are often wrong.
What is your ongoing involvement with M7, and how do you describe the relative parting of ways looking back?
I’m still a senior advisor to M7 and I’m very committed to helping them achieve their goals, and the relationship with Oxford is fabulous.
I’m taking away the bits of the business that fall outside of M7’s strategy. M7 is being streamlined to be a focused manager of last-mile warehousing, logistics and retail parks. It will grow and it will have huge success, and I hope to be there for part of it to help.
But things like Central Europe, things like the small balanced funds – it’s just not where M7 and Oxford want the business to be. But I still think there’s opportunity in all kinds of little nooks and crannies of the market. I’m like a magpie and fly to things that are shiny and quirky, particularly in this opportunistic market, and that probably doesn’t completely suit the grown-up business that M7 is.
When Oxford bought the business, I was always going to be around for three years to help integrate it. But there was the ambition – I think everybody knew this – that I would go off onto something else once the business was integrated. David [Ebbrell] was already the CEO and I’d stepped up to chairman.
Do you feel emotional looking back on it?
No. M7 was something that I built with my friends. It’s been very successful. It’s got a lovely reputation. Its alumni is phenomenal. I think Oxford is the right home for it. I think so highly of the Oxford team and I think so highly of David. It’s in the right hands.
I hope further down the line that Oxford might get involved in some of the things that I’m doing as they get scalable. I’m very proud of M7 and I just hope Martley can be as half as successful as M7 is.
How did you go about shaping the Martley team and the vision of the business overall?
M7 is the blueprint. A team affair. We have started the business with a surprisingly large amount of people, like we did with M7 – though we have more business to go with the people than we did at M7, so it’s not quite as mad.
“What I don’t want to do is to be sat in a bar somewhere at the end of my career having not tried”
I’ve never been a solo artist. I’ve always tried to be a member of a band. First of all there was Halverton, then there was M7, now there’s Martley. And all of them slightly different teams. But there’s been a theme. People like Jack Thoms and Andrew Jenkins have been a theme throughout. And the plan is to, again, build another ensemble.
I like surrounding myself with intellectually brilliant people and I think at Martley we have a really exciting team that, in markets like this, create cerebral opportunities. The ambition is for Martley to be a bit more cerebral than most, to really think about what it does, and to do so as a team endeavour.
Big picture, how do you view the European real estate market, and where it is in the cycle?
In 2008 it was rivers of blood. 2024 is more like arterial spray. Not everybody is just bleeding. Some people are. A lot. Or spraying, even.
But unlike 2008, there are many more segments to the real estate market. So there are sectors that exist now that didn’t then – multi-family and student weren’t anything like what they are now, for example, or indeed urban logistics.
Certain submarkets of real estate have been much harder hit than others. Industrial hasn’t been that heavily hit, nor has student housing. Others, like office, have just been obliterated.
I’m more interested in the markets that I think are oversold. And I’m interested in bits of the cap stack that I think produce outsized returns. So where’s the market generally? There is a whole load of opportunity in it. I hope we’ll do deals this year that we’ll look back on in three years’ time and think how good they were.
I think in certain subsections of the market, there is real opportunity and we’re probably close to the bottom. Whether that plateaus along the bottom for a while before it recovers, we’ll have to see – but I think the recovery in retail over the past two years is telling in terms of what might happen to the office market.
Do you see opportunities in the public markets?
The public markets are mad. There is so much beta-driven movement, down just to what the latest inflation indicator is or whatever it may be.
As long as you are not investing too much, you can take up prudent positions quite quickly without moving the price, and exit having made quite a healthy return without having done very much. It’s not necessarily a long-term game.
But you’ve got to be prepared to be actively involved. You also need to know the portfolio. We have the advantage that this isn’t just punting. We know the portfolios of quite a few of these companies and there is the opportunity to do some quite interesting deals. So, we won’t be an activist shareholder, but we will be an active manager of our capital.
There are companies that look just absurdly cheap, particularly those that are externally managed that, usually unfairly, are just hated by the market.
Why did IPSX fail?
Basically, IPSX was overly complicated. It didn’t have any connectivity. The idea of fractionalisation is appropriate, but also, the management went for a very blue-chip model, so the cost of putting anything on there was way, way, way too much – and it’s very off-putting for the vast majority.
The Mailbox has been delisted from IPSX and is now managed by Martley
But it’s not because the idea was bad. The execution was woeful, and I was part of that execution, so that still lands with me. I was a director of IPSX and I wish I hadn’t spent the millions of pounds that I did to learn the lessons I did.
Do you think the concept has a future?
Fractionalisation of everything is coming, whether that be through tokenisation or securitisation, be it in fine art, expensive cars, or super-rare watches.
Whether we succeed in being part of it in the end, that’s a second question. But the largest asset class in the world, by a mile, is real estate. And the asset class that everybody wants to be invested in is real estate. And if you’re a member of the general public, you can’t participate in the vast majority of the real estate market, other than buying your own house. And even that is not available to everybody.
REITs are a potentially broken model because they trade at such big discounts, and pricing of the bigger companies don’t really move because of any real estate news – they are more of a FTSE 250 proxy.
Somebody’s going to make this work. I’d love it to be Martley, but I accept that there’s a good chance that it won’t be! That doesn’t mean that I don’t believe in the concept and I don’t want to try and make it work.
What I don’t want to do is to be sat in a bar somewhere at the end of my career having not tried, and then read about somebody who just made a billion quid because they’ve cracked fractionalisation. That would upset me. You’d see a grown man cry in a bar, and I don’t want to be that man sobbing into my piña colada – it would be a tragic look!
To see the original React News story please click here.