Leaked Emails, Bad Bets Throw Real Estate Investor Into Strife

Athens-based Bluehouse attracted money managers for decades with the lure of juicy returns. When those didn’t materialize, hundreds of internal documents turned up instead.

(Bloomberg) — When real estate investor Yannis Delikanakis woke up from a 26-day coma in April 2020, he discovered that his bank accounts had been frozen and he’d been ousted from the private equity fund that he had co-founded 16 years earlier.

In the weeks before the Athens-based Bluehouse Investment executive slipped into a Covid-induced coma, he’d been wrangling with his partners about the fund’s valuation. Delikanakis believes they took advantage of the moment to cut him out of the firm after disputes over its poor performance.

“As far as the outside world is concerned,” one of the two remaining partners wrote in an email reviewed by Bloomberg sent shortly after Delikanakis fell ill, “YD is taking a step back from work to focus on his recovery and will no longer be active in Bluehouse.”

That fight is now spilling into court — just one of many legal fronts for a small private equity shop that attracted money managers over the past two decades with the lure of double-digit returns from investments like a giant mall in Greece, a glass office tower in Kraków and land development projects in Bucharest.

The firm has been slow to hand back cash to investors, with its first fund delivering a return of around two percent per year and the biggest one still underwater, according to documents reviewed by Bloomberg. Clients hired law firms to investigate fee mismanagement, including allegations that executives grabbed performance fees even when they didn’t meet the threshold to do so, and are still waiting on asset sales 19 years after launch.

Delikanakis has filed lawsuits against Bluehouse alleging corporate infidelity, fraud and tax evasion, according to documents seen by Bloomberg. The firm is separately suing another former executive for allegedly leaking internal emails that could be perceived as damaging to clients, Bluehouse said in emailed comments, an allegation which the former executive denies. Authorities in Cyprus are probing an alleged breach of regulations, and some investors have hired forensic accountants to compile a report looking into the firm’s actions, a copy seen by Bloomberg shows. Bluehouse, in response, says that it is the target of an anonymous smear campaign.

Lofty Ambitions

Delikanakis founded Bluehouse with Charalambos Pandis and former investment banker Victor Pisante in 2004. The firm, which invested in real estate assets across Central and Eastern Europe, went on to attract around €500 million ($538 million) from players such as the World Bank, Partners Group AG, the European Bank for Reconstruction and Development, the Rockefeller Foundation and several Greek shipping magnates. 

In its presentation to investors, Bluehouse pitched “superior risk-adjusted returns through equity and debt investments in real estate assets.” It launched its first fund in 2004 and its most recent in 2016. During those years, the outlook for the real estate market in Eastern Europe was promising, and investors were lured by the offer of relatively high returns and Bluehouse’s statements that it had deep relationships with successful local development firms, an internal document shows.

Yet over the years, Bluehouse failed to deliver on many of its ambitions.  

The partners’ focus on spending over divesting meant that new funds were rolled out before managers could close existing ones and return capital to investors, according to people familiar with the strategy who asked not to be identified when discussing sensitive matters. More assets under management meant higher fees for its partners — a fact that became especially important as the predicted potential of Eastern European real estate markets never came to fruition.

Years later, some investors only just made their money back, and long after one of Bluehouse’s funds went into liquidation, others are still waiting for their capital to be returned. The Rockefeller Foundation, the EBRD and World Bank said they do not comment on individual investments in their portfolios. 

Of the €130.1 million committed to Bluehouse’s second fund, as of 2021, investors only received €23.6 million back, a report at the time showed. Attributing the poor performance of that fund to the impact of the 2008 financial crisis, a Bluehouse representative said that it has now returned 80% of investors’ money.

Lengthy lock-up agreements in the contracts also made the money in Bluehouse’s two main funds difficult for investors to access — which will remain the case until Pisante and Pandis liquidate the funds and sell their remaining real estate assets. When reached for comment, a representative said that nearly all the assets in Bluehouse’s two main funds have already been sold. 

Partners Group, which acquired its stake on the secondary market and declined to comment, sold off its remaining holdings in recent months, according to people with knowledge of the matter who asked not to be identified as the information is confidential. Other investors are still waiting. Rising interest rates and plunging property values could mean that investors will have to wait even longer – or risk taking a bigger hit than they might have anticipated. 

Bluehouse’s executives, however, may be in a different situation. While private equity firms typically contribute some of their own money as so-called “skin in the game” when they raise funds, Bluehouse leadership funded at least part of its commitment with a loan from a group of banks, according to a 2020 loan document reviewed by Bloomberg as well as people familiar with the matter who asked not to be identified when discussing private information. When reached for comment, Bluehouse said the loan was to fund working capital. 

Fee for All

As balance sheets declined, Bluehouse’s fee structure became a major source of contention. For a targeted 15% internal rate of return on its initial fund, Bluehouse charged advisory fees of 2% with fund managers netting 20% of profits after hitting an 8% return for investors, according to the fund’s documentation in 2004. 

Yet some investors thought the relatively poor returns didn’t justify the 2% advisory fee, and in certain instances stopped paying fees altogether after 2020, according to a person familiar with the private investor discussions. Individuals with knowledge of the matter said that scrutiny intensified after investors alleged to their lawyers that Bluehouse partners pocketed excess interest even though the funds hadn’t achieved hurdle returns — the minimum return that a fund must achieve for investors before the manager can partake in the profits.

In response to a request for comment, Bluehouse said in a statement that payouts, “if due, will depend on the ultimate performance of the fund which will be determined by the Fund’s auditors when the last remaining asset has been disposed.”

Tensions erupted one snowy day in Athens in February 2021, when the realization spread in the Bluehouse office that hundreds of internal emails had been sent to investors, banks and third parties, according to a person present who asked not to be identified when discussing sensitive matters. Within the emails were allegations that a banker at Deutsche Pfandbriefbank helped Bluehouse get a “haircut” — repay less than what was due on a loan after collateral was written down. That allegedly took place in exchange for an €800,000 personal payment to the banker. A representative for Deutsche Pfandbriefbank did not respond to multiple requests for comment.

As phones started ringing off the hook, the partners quickly sent out an email apologizing for the leak and denying that any of the allegations were true, according to a person present who did not want to be identified when discussing sensitive matters. A representative for Bluehouse said investors and partners were kept apprised of the “anonymous campaign.” 

Bluehouse hired the law firm Pamboukis Maravelis Nikolaidis and Associates to review the anonymous emails, and it later concluded that there was no evidence substantiating any claims of impropriety, criminal actions, or fund mismanagement, according to a letter from the law firm that was sent to investors and seen by Bloomberg. Bluehouse also commissioned auditing and advisory firm Deloitte to address whether its fees were within market range. Deloitte did not respond to a request for comment, but the subsequent report, seen by Bloomberg, concluded that they were. 

In the following months and years, SPDI, a former business partner and real estate investor, filed a criminal complaint against the remaining Bluehouse partners alleging fraud, related to a previous joint investment. Regulators in Cyprus and Luxembourg, where Bluehouse is licensed, were also contacted by law firms on behalf of investors about alleged misconduct at the firm, according to letters reviewed by Bloomberg. 

In an emailed statement to Bloomberg, the Cyprus Securities and Exchange Commission said that in the wake of inquiries into Bluehouse “that indicated a cause for concern, there is an ongoing investigation into an alleged breach of the relevant regulations.” Luxembourg regulator Commission de Surveillance du Secteur Financier (CSSF), which requested information from Bluehouse about its first two funds in 2021, according to a letter reviewed by Bloomberg, declined to confirm that any inquiry was open at this time.

Then, six months ago, the advisory firm A&M, which had been retained by the law firm Michael Kyprianou & Co LLC on behalf of a Bluehouse investor, published a forensic accounting report that reviewed allegations of fund mismanagement, fee distributions and suspicious payments. 

The report determined that investors in Fund I were owed excess interest that was never paid out. It showed in one instance that the general partners “received a total of €3.6 million,” despite the fact that under the fund’s terms, partners should not have received any profits. The A&M report commissioned on behalf of an investor also concluded that the Deutsche Pfandbriefbank banker who received a payout from Bluehouse was likely being rewarded for some other past service.

In response, Bluehouse says it was not aware of the A&M report, and that payouts to investors in Fund I would be calculated once the fund’s remaining assets had been sold. Bluehouse also said that payments to partners had been verified by the fund’s auditors, and denied any wrongdoing in relation to the DPBB banker. 

As Bluehouse’s funds wind down, these disputes will likely be resolved in court. Hearings for the two lawsuits Delikanakis filed against his former partners began in April, according to a legal filing.

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