The deal will see Babcock & Brown gather together various investments that it has made with Primelife which specializes in aged care housing and nursing homes.
The announcement was made by the firmÆs head of corporate finance, Rob Topfer, at the UBS Financial Services conference in Sydney. Topfer told the audience that the time had come to increase the size of the business and generate greater cashflows û scale that would be achieved by establishing a managed investment vehicle.
Topfer says the vehicle will hold all or some of the assets that it has accumulated in the aged care arena.
Babcock & Brown first identified retirement villages as a high growth sector fuelled by the countryÆs aging population in 2003 when it made a 20% investment in the chronically underperforming Primelife.
Since then it has expanded the relationship to include a 50/50 joint venture in a development company and a 49% interest in PrimeLiving Trust.
PrimeLiving is an unlisted trust and was set up at the end of 2005 to invest in retirement villages in Australia and New Zealand. The trust now owns three villages in New South Wales (with another four under contract), five villages in New Zealand and a 19.9% interest in ASX listed operator, Aevum. It also has another four villages under contract in Australia.
Primelife manages the trustÆs assets and is also a 25% shareholder. The other 25% is owned by MFS Group.
Topfer will have an uphill battle convincing investors that Primelife has overcome its early financial difficulties. He admits the process will require ôeducating the market about the characteristics of the low volatility incomeö that comes from retirement villages, and encouraging them to take advantage of a fledgling fragmented cottage industry.
In its short existence, Primelife has never been far from the headlines. While Topfer was presenting to delegates at the UBS conference, the companyÆs founder Ted Sent was in the Victorian Supreme Court pursuing a wrongful dismissal case against Primelife and demanding A$5 million in damages.
Sent was sacked as managing director in 2003 when high profile mining millionaire Robert de Crespigny and former Victorian Liberal Party director Ron Walker came to the cash-strapped companyÆs aid with a loan of money.
The new investors uncovered a large volume of inappropriate related party transactions and claimed that Sent had improperly taped staff telephone calls. At that stage, Primelife was also being investigated by the Australia Securities and Investments Commission (ASIC) for the activities of 37 investment syndicates which had invested in Primelife retirement villages.
de Crespigny and Walker settled the ASIC investigation in April last year by agreeing to pay A$1 million towards the costs of an independent accountantÆs report into the unregistered investment schemes and another A$600,000 to cover ASICÆs legal costs.
The settlement was significant given that the company made earnings before tax in financial year 2005 of A$3.7 million, and an after tax loss of A$35.8 million.
Topfer says PrimelifeÆs corporate turmoil has now been ôcleaned upö and that the success of the PrimeLiving Trust is proof of that.
He says the establishment of a dedicated aged care fund will allow Babcock & Brown to achieve the same financial engineering benefits that it has built its reputation on, including generating M&A income for the corporate finance group, creating development opportunities for the property group, securitisation opportunities for the corporate finance group and annuity income from the management of the vehicle.
The other big Australian player in aged care market is Macquarie Bank which spent A$552 million last year buying CanadaÆs largest private operator of long-term care homes called Leisureworld. It also owns just over 45 retirement villages in Australia.
Macquarie also follows the strategy that its aged care assets act as feeders to various parts of its investment banking business.