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From first equity to final curtain
Sunday, March 29, 2009
It was never supposed to end this way. Late last Friday afternoon, the High Court appointed a liquidator to the company behind First Equity Group, an Irish investment firm that worked on projects worth more than €3 billion.

More than 400 investors - mainly wealthy Irish people - had ploughed millions of euro into the group, which operated through a complex series of companies. Their money was invested in everything from apartments in Beverly Hills to villas in France and Italy and a €500 million ski resort in Suffolk.

Many of the projects have stalled and, this weekend, those investors are trying to assess if they will get any of their money back. For the majority of them, the answer will be no.

The appointment of a liquidator is likely to trigger the appointment of receivers to various developments and assets within the group, as the company’s bankers and secured creditors attempt to claw some of their money back. With the banks moving in on the assets, the 400 high net worth investors are likely to be left nursing the bulk of the losses.

The liquidation came after a proposed multimillion euro rescue package for the group came unstuck. Gallium, the holding company behind First Equity, has been under the protection of the High Court since January, after it admitted to cashflow problems.

The examiner to the company, KPMG accountant Kieran Wallace, had been negotiating deals with creditors and banks in an effort to save the group. As recently as last Wednesday, a deal seemed possible - banks had been lined up to provide additional finance, and creditors were about to be briefed on a scheme of arrangement. On Thursday, however, Bank of Scotland (Ireland) withdrew its support. The bank’s financial commitment, along with that of AIB, was crucial to the company’s survival.

Under the proposed package, unsecured creditors were to receive a 5 per cent dividend on their debts, while they would also have been offered the chance to take preference shares in Gallium. Secured creditors, such as banks, were to be paid in full.

As part of the restructuring, investors were to be asked to forgo returns on the investments, but would receive their initial investment back once all the First Equity projects had been completed. The scheme was complicated, but it centred on banks injecting working capital, investors remaining patient, and unsecured creditors writing down their debts.

Without Bank of Scotland (Ireland) on board, the rescue package simply fell apart. The liquidation process will be no less complicated, as Gallium has provided guarantees to investors on specific projects and some investors hold bonds over individual assets.

As banks and investors this weekend assess who has title over the various developments, one thing is clear: First Equity’s assets are worth significantly less than it paid for them. Even in cases where it has secured planning, it cannot get development finance. And with property prices down and few buyers in the market, selling the assets is not an ideal option.

The events of the past six months represent a major reversal of fortune for First Equity, which has been in business in one form or another for about 15 years. Its first incarnation was as First Equity Investments, founded in Dublin in 1994 by Tom Dowling. Like fellow investor Derek Quinlan, Dowling is a former inspector of taxes and, in the early years, he provided tax advice and corporate finance services.

Specialising in income and rental tax shelters, he put together deals including the development of the old Irish Press building, the Shelbourne Park racetrack and the Zanzibar and George pubs in central Dublin.

Dowling’s clients included several so-called ‘Microsoft millionaires’ - Irish employees of the software giant who wanted to invest money they had made on shares. ‘‘From the late 1990s onwards, he did a number of I rish deals and made a lot of money for people,” said one source.

As the economy boomed and the Irish love affair with property investment spread further afield, Dowling saw a chance to expand the business. The plan was to bring property development opportunities in Europe, the US and beyond to wealthy Irish investors.

Quinlan was doing it with Quinlan Private, Kevin Warren was doing it with his private client business, and newer firms such as Claret Capital were also tapping wealthy investors. Dowling wanted a slice of this growing - and very lucrative - market.

What emerged was the current First Equity Group, which was incorporated in 2004 as Gallium. According to the source, the idea was to bring together what had been ‘‘a collection of individuals and deals’’ into a professional firm with recurring income and one balance sheet.

In April 2006, accountant Alan Barry came on board as managing director and 35 per cent shareholder. A brother of Jim Barry, chief executive of utilities firm NTR, Barry had worked in investment banking for nine years, holding senior positions at Goldman Sachs overseas.

The plan was to combine Barry’s experience in finance and building a team of people with Dowling’s property and tax experience. The firm hired a number of staff - including former bankers, accountants, lawyers and salespeople - for its plush office off Dawson St in Dublin. As it expanded, it later opened offices in London and Los Angeles.

First Equity described itself as ‘‘a practice specialising in sourcing and placing equity and mezzanine finance, primarily for asset-backed investments’’. It spoke of ‘‘a growing investor base of high net worth individuals and small institutions’’ doing international deals.

As one source put it, First Equity was ‘‘dragged up from Division Two, and knocking on the door of the Premier League’’. Many investors liked what they saw and came on board.

The first issue of the company’s client newsletter, dated ‘Winter 2007’, told a compelling story. In it, Barry said that First Equity had ‘‘closed over 70 deals in ten different countries since inception, representing approximately €3 billion of development value’’.

Almost 80 per cent of those had b e en sold on ‘‘with consistently superior average investor returns in excess of 20 per cent per annum’’, he said.

He said the company had a ‘‘robust’’ pipeline of business and referred to the fact that the company had received approval from the Financial Regulator. ‘‘This would not have been possible without having the structure and resources necessary,” Barry said.

The newsletter also gives a snapshot of First Equity’s activities, listing 16 ‘‘active’’ projects at the time. Just one - the purchase of a site in Tullamore - was in Ireland, with six in Britain, four in the US, two in France, and one each in Italy, Romania and St Lucia.

The British deals ranged from buying a commercial space on the site of the old Wimbledon FC football ground to buying a residential block in east London. First Equity also part-financed offices in Kensington, a shopping centre development and a ‘‘land assembly project’’.

Most eye-catching, however, was the company’s majority shareholding in a 360-acre Suffolk site that was earmarked for the world’s biggest indoor ski slope. The SnOasis project - which got full planning permission in November last year - was also to include a hotel, hostel, ski lodges and 40 acres of residential development. It is not clear if this will ever happen.

According to the newsletter, First Equity entered the US market in August 2006, and had invested more than $75 million in developments in Los Angeles. Aqua Vista, a residential development in Studio City, took an initial $16 million. Work was due to start in January 2008.

Another $12 million went into a project called the Gables, and the same amount went to a ‘‘retail and residential development in the heart of the Asian community’’. The biggest deal was the buyout of two sites in Beverly Hills, with plans for 80 condominiums and shops.

While the sites are described as ‘‘exceptional’’, they did not come cheap - the ‘‘first phase of funding’’ for the deal amounted to $35 million and First Equity planned to raise $25 million more ‘‘to fund the construction phase’’.

In the newsletter, Dowling said that the business was ‘‘well ahead of the various goals and financial targets’’ it had set. He thanked the investors for their ‘‘well-placed confidence in our ability to generate wealth for you’’. (At the same time, Dowling said that his focus was on ‘‘working at the business, rather than actually in it’’.)

Dowling even indicated that the firm was dealing with the effects of the credit crunch, which had started to make its presence felt. ‘‘The recent credit crisis will only represent a danger to the real economy should the current block on liquidity be maintained for any significant period of time,” he said. Unfortunately for First Equity, that was exactly what happened.

The first signs of difficulty emerged around October last year, when word circulated in Irish business circles that the Aqua Vista project had run into funding problems. Worse still, the site had declined sharply in value, with some suggestions that it was now worth about $5 million.

The firm held a meeting to reassure investors, with Barry pointing out that there was ‘‘paralysis’’ in the credit system, so getting construction loans was not possible. That meant holding and maintaining the sites - a process that itself cost money which the firm had not included in its plans. Barry’s plan was to convince the investors to stump up more money.

His message was that every finance house in the world had the same problems, but that First Equity had strong assets and could afford to bide its time. The approval of planning for the €500 million SnOasis project in November deflected some attention.

Barry described it to The Sunday Business Post as ‘‘a key investment milestone’’, indicating that the firm might look to the Middle East, Russia or even India for partners to develop the resort.

Others were sceptical.” Even with planning [permission], who’s going to bank that?” said one source.

A little over a month later, the sceptics were proved right: on December 23, an interim examiner was appointed to Gallium, putting a freeze on First Equity.

On the same day, Dowling wrote to investors to inform them of the examinership, which he described as ‘‘the right decision under the circumstances’’.

He emphasised that, while the firm was in examinership, ‘‘this action does not affect the projects managed by First Equity’’.

‘‘This is a responsible measure designed to ensure the continued viability of the company, and to ensure that all the company’s projects can continue to be proactively managed by the firm,” he said in his letter on December 23. (Even then, there was a hiccup: the High Court initially refused the appointment of an examiner, but the Supreme Court later over-ruled its decision.)

An independent report, prepared by accountant Paul McCann in Grant Thornton for the examinership, said that Gallium had cashflow problems, was unable to pay its debts, and ‘‘is therefore insolvent’’.

It described how the firm had ‘‘temporarily’’ loaned its own funds to invest in deals during 2007 and 2008, but the money had been tied up longer than expected.

First Equity then called on third parties to complete certain deals, but they had ‘‘neither the will nor the ability’’ to close the deals. As a result, it could not meet interest payments on two loans. A ‘‘small number of loan note holders’’ were also demanding repayment of their loans, putting further pressure on the firm - and prompting the examinership petition.

McCann’s report needed a diagram to show the relationships between various companies in the group and shows the movement of multimillion amounts in euro, sterling and dollars.

Dozens of investors - including Barry’s brother, Jim - are listed, and the financial institutions named include Bank of Scotland (Ireland), AIB, Anglo Irish Bank and First Active.

The accountant estimated that there would be a deficit of €24 million if First Equity was put into liquidation. That eventuality became a reality on Friday afternoon with the failure to seal a rescue package for First Equity after three months of attempts.

As new efforts begin to unravel the company’s assets - and determine who is entitled to payments - First Equity’s investors and bankers will be counting the cost for some time.

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