“We can look at numbers all day, but would you put your parents in a space where you are not happy?”
David O’Shea cut his teeth on a dozen trading floors, eventually setting up his own company, BlackBee in Cork. His latest investment play is centred on the nursing home market, a sector he feels is long overdue for change.
If your vision of what traders do is coloured by having watched Martin Scorses’s The Wolf of Wall Street, David O’Shea is here to tell you the reality is somewhat different. He has spent years working on trading floors and at hedge funds, including a stint involving passive investing, essentially tracking an index regardless of whether it made much sense to do so.
“I had to spend 25 per cent of my portfolio in Japanese bonds because they were in the index, even though they were in yielding zero”
O’Shea tells me inbetween meetings with potential investors in Dublin for the flagship fund of his company BlackBee Investments.
“I didn’t see any value being added for investors. It’s easy in such cases for large assets managers to get disconnected from investors.”
The 44-year-old set up the Cork-based company five years ago and has quietly built up €400 million of assets under management. When the Business Post meets him, he’s pitching Blackbee’s flagship €250 million fund, which will invest in Irish nursing homes, building up a new brand that will be the largest of its kind in the country by far.
From Waterford, O’Shea went to UCC where he graduated with a degree in economics and history. Before embarking on his finance career, he spent a year at the University of Limerick on a course that taught entrepreneurial skills, which he says have come in handy as he built up Blackbee. He completed a Master’s in finance at Maynooth, and embarked on a career working for fund managers in Italy and Switzerland. He says it was exhilarating to be given responsibility for managing hundreds of millions of euro, but what he really wanted to focus on was putting more of his own investment ideas to clients.
O’Shea moved back to Ireland to work in Cork just before the financial crisis kicked off. After a few years, he began to develop plans to break out on his own.
“We started off with a small amount of cash. I’ve had one or two other shareholders, but it’s mostly been under my own steam. One thing you learn from markets is that you’ve gotta feel the pain. You really feel the pain when you put your capital in and put your own reputation on the line.”
One thing he insisted on from an early stage was giving 10 per cent of the firm’s profits to charity.
“One of the funds I invested in as part of my portfolio was doing this, and I was amazed by it,” he says. “When I met them, they inspired me to do the same thing. For me, as a business owner and someone who believes in markets, it’s really empowering to go into work every day and know we can have an impact.”
A lot of Blackbee’s early work involved real estate and hotel deals as well as providing credit. O’Shea didn’t pore over share prices, bonds or derivatives to put in front of investors. Instead, what he aimed to generate was ideas that clients would not get anywhere else, and that would provide long-term, stable returns.
Markets have been on an incredible run over the last few years and, thanks to Central Bank interventions, yields on bonds have fallen to all-time lows while interest rates are in negative territory. To generate returns, fund managers have to either look at taking on more risk, which increases the potential for losses, or consider different types of investments.
“There is no point in me trying to be the best global equity investor. I’d need a team of 40. We are seeking out where the best ideas come from. Ideas come from looking at longer term trends and seeing where they are,” he says.
Scanning the economy for opportunities, O’Shea and the BlackBee team identified Irish infrastructure assets, thinking about things like renewable energy and other projects.
“These infrastructure assets may have been considered alternative, and maybe they were 5 per cent of your portfolio,” says O’Shea. “The more we looked at it, we felt it should be the bigger part of your portfolio” says O’Shea. “The more we looked at it, we felt it should be a bigger part of your portfolio. Long-term yields, long-term rents, long-term cashflows, and a lot of them government-supported. The best thing about them is, they contribute locally.
“So we put a focus on what we could do in Ireland. Yes, we like to trade international stocks and bonds for our clients, but where is our real value? Our real value is our proximity to infrastructure here in Ireland.”
The opportunity Blackbee has alighted on now is nursing homes. All of its analysis points to a significant potential to build up the country’s biggest and only integrated residential care group. The demographics are in its favour. Ireland’s population is ageing. There will be a million people over 65 by 2040. Nursing home standards, in some cases, can be poor and many have received little investment for years.
What is needed is an integrated operator and owner who can deliver a better standard of care. The money to be made is stable. The Fair Deal Scheme has set the terms. The industry is regulated by Hiqa. So investors know what they are getting and how much they can make from it.
O’Shea believes the current residential care model in Ireland is broken. In many cases, the company operating the nursing home is a different company from the one that owns the actual building. The property owner only cares about rent, and the operator has little incentive to invest in the facility. The patient loses out as a result.
“What we noticed was that a lot of the stock we will have to use is not fit for purpose,” he says. “Would you check into a hotel where you share an en suite? No you wouldn’t, so why should we expect other people to do that?”
Researching the nursing home sector has occupied much of the last year for O’Shea. Blackbee has been looking at nursing homes across Europe, travelling to Scandinavia looking at how they have solved the problem of delivering residential care.
“In Scandinavia, it’s quite interesting. They have creches in nursing homes. There is positive impact by having old and young together.”
Blackbee has created its own integrated company called Aperee that will build and buy care centres and also operate them. It has hired experienced care industry executive Paul Kingston to run Aperee. The incentives of having Aperee within Blackbee is that everyone’s interests are aligned and it should lead to a better standard of care for residents.
“We can look at numbers all day, but when you talk about care, you are talking about your parents or ultimately us. Would you put your parents in a space where you are not happy?”
Having announced plans for Aperee in the summer, momentum is building up to Blackbee’s first deals. O’Shea says it is close to announcing the takeover of two care homes and the planning application for its first development in Cork, which will also include a creche and other facilities.
Spending €250 million will make Aperee the largest player by far. In total, through its own developments and what it buys about 2,500 people will be employed. Scale is important to the venture given the cost of development – a single centre can cost up to €12 million. Building up a chain leads to efficiencies and will smooth returns for investors.
“When we are bringing such a large amount of money we have our multiples in terms of where we will buy. We won’t over pay because ultimately we have to calibrate out investment for returns [to our investors].”
So far, appetite is strong. Investors from Ireland have already committed €30 million and a European roadshow should double that figure by the end of the year.
What is remarkable, O’Shea says, is that interest among international investors for Irish infrastructure investment projects is very strong, yet Irish firms are sending money from domestic clients overseas.
Indeed, not only are companies sending money overseas, they are increasingly selling out themselves to larger investment firms. Part of the reason for that has been the increased cost of regulation and compliance, which makes it harder for firms to make money.
O’Shea is in favour of those extra regulations. It gives a new company like Blackbee a competitive edge on firms that are only making the investment in beefing up their regulatory teams.
“There is huge consolidation going on. It is being driven by regulation. It is becoming hard to cope, but it is a good thing consumers are being protected more. If that is the new standard, great. Why not turn that into a positive and embed it in the firm? Compliance forces you to think of better products,” he says.
O’Shea is also adamant that being based in Cork doesn’t make it difficult to compete for finance staff with London or Dublin-based firms.
“Why not Cork?” he asks. “For staff, the quality of life is good. Cork is emerging as that proper second city. It’s a vibrant city, and it gives you something a little bit different. Markets are everywhere, and I thought it was a better opportunity to recruit staff.”
Blackbee employs about 40 people, and plans to build that number up towards 100 over the next year or so, with a plan to grow its assets to €1 billion. And with Aperee closing in on its first deals, attention within Blackbee is turning to the next ideas.
“We’ve spent five years building out the company and investing in ideas and staff. The healthcare fund was our first step, and that was a year in gestation. We hope to launch a renewable energy fund of the same size. Solar is very interesting. Social housing is very interesting. We like to think we have the way to do it. It’s about taking a long term approach.”
This article appeared as a profile interview in the Business Post on 24/11/2019 Interview by: Ian Guider. Photo Credits: John Allen