Special feature: Greece

Interview with Mr. Antonios Achilleoudis, Founding Partner and Group Managing Director of Axia Ventures Group

March, 2018

The macroeconomic indicators for 2017 have been positive and point towards an optimistic near future. Real GDP growth has been on the rise for last three to four consecutive quarters driven by elements such as consumption, investment, exports as well as tourism. International credit rating agencies have also corroborated this optimism. Moody’s has been the last to just recently bump Greece up two notches in its credit rating. In this context what is your personal assessment of the current economic situation of Greece and do you think 2018 will be the tipping point for Greece to return to sustainable growth?

Mr. Antonio Achilleoudis: I think there are two speeds. The faster speed involves the reduction of sovereign risk. Greece has gone through very turbulent times over the last few years. Over the last seven or eight years the constant discussion amongst many people was GREXIT. After the first review was wrapped up in 2016 we began to put all of that behind us. This enabled us to see a de-risking process of the sovereign. The Government of Greece has the backing of the opposition and even though there are many differences of opinion between the different parties, the one thing that they agree upon is that we need to apply discipline and make changes to our economy in order to move forward. Even though they don’t agree with the structure of the reforms, this government is pushing forward and supporting these adjustments. It means that the whole political system is working towards finding a solution to the economic problems. The difference between Portugal, Cyprus, and other countries that have undergone memorandums of understanding or structural adjustment programmes is that all the major political parties stood behind the process, and this enabled unity in terms of passing laws and implementing them. That is why they entered and exited the structural adjustment framework. When the current government was a party in the opposition they obviously did not support it, which created a lot of challenges and the risks remained leading to the dramatic evens of 2015.

Coming into 2016 the government made a 180 degree turn towards applying all the necessary laws in order to implement the changes that were needed, based upon the changes that the troika required. So if an investor looks at Greece it will see a country that if you lend to them, in 10 years you will get your money back. That is the conclusion we have reached. Except that at the time Greece was paying 9% as opposed to Portugal, which was paying you 1%. We saw it as a massive arbitrage and communicated that to many of our institutional investors who at the time were looking at Greece and were shell-shocked because of the turmoil the country had experienced since 2015. Thus we felt that this de-risking of the sovereign risk would bring down rates and spreads would come closer to that of other European countries. In addition, many other things would rally along as well. For instance if you buy real estate you expect to have a capitalization rate that is similar to the country in essence. So if the country is at 9% you can’t buy real estate at 4%, no matter how prime it is. Therefore even if you have Microsoft as a tenant for a 20-year lease in Greece versus Romania, you probably will get double the yield in any other place in the world.

All these conditions created opportunities for arbitrage because we were convinced that the Greek government would not default. The fact that you had similar assets, properties and risks with other investment opportunities that yielded much higher levels of returns, created an opportunity. For us it meant moving into real estate irrespective of what the economy did, and we knew that the economy would eventually stabilize because it had contracted 27-28% from its peak. If you lose so much of your GDP due to the shock of 2015 with banks shutting down, and survive it with a slight decrease in GDP instead of a massive decrease, then it means that the economy has pretty much bottomed out. Now, you are not going to see the runaway growth that you could have seen if there were investor trust and confidence in the country and its institutions, but you will see stability in the economy that in turn means that you can actually forecast for the future. In addition, you see the de-risking of the sovereign and that means people will be willing in the future to take greater risks or to perceive Greece as being less risky than what they still do today. The combination of those factors made Greece very interesting and still continues to do so.

As we have seen yesterday Greek debt was upgraded and the market took a breather because it was expected and already priced in. But at the same time we haven’t seen as big of a rally in other asset classes as in Greek government bonds, so the sovereign is widely recognized as being de-risked, but not the country as an investment destination. There are certain asset classes that relate to tourism for example that are trading at single multiples as in other countries. But I would say that real estate broadly is not. It is still at very stressed levels. Company valuations are not and investors are still looking at Greece very cautiously and treating it as a very risky place to invest. I think it will take time, effort, and energy in order to regain the trust more fully.

In an interview you gave in 2015 for Bloomberg, you mentioned that if the trust is not regained then it would be difficult for Greece to get back to a pattern of sustainable growth. At this point today has some of that trust and confidence been regained?

Mr. Antonio Achilleoudis: I cannot say that we have not improved; but we are not anywhere near where we should be as a country. Trust goes beyond not defaulting. If you lend money to someone and know that their father can return it to you, that does not mean you truly trust that person, or that he is not going to lie to you. Greece as a country still has a long way to go to truly regain trust, and become a choice destination for global capital. What we will see in my view is that in order to move towards that direction the Government of Greece has some distance to travel, but private enterprises will have to take the lead. Money will flow whether it is from the official sector or private money, it will allocated to enterprises who are progressive that can accept proper governance, as well as being diligent in reporting their financials. Basically we are talking about companies that can be globally competitive. So if somebody comes to Greece to hand over money to a businessman, that is because they view that opportunity as being better than somebody in Texas, Australia or Italy, for example. The reason why they are choosing that specific company and that entrepreneur is because they feel certain trust towards him, and certain value in that investment versus other alternatives.

Money will flow and decent returns will come based on the risk that investor takes because it is global capital. There is no real local money to go around because the banks in Greece will not lend like they used to in the past. This global capital will go to certain groups that will in essence in our view be the leaders of the future, and they could also become global leaders in certain things. So with that in mind there will undeniably be followers because these are the examples people want to mimic. In the past they might want to emulate somebody who might have bank connections or government connections because that circle made them successful. However, that circle does not work any more or we could say at least that it is broken, even though there are still some signs of it. In our view the future of Greek enterprises means they must take the lead in globally competitive circumstances, products, services or businesses.

If we start with tourism, the trust that comes is not so much derived from existing entities. Although it is the number one contributor to the country’s GDP, there is no single investible vehicle where somebody can come in and invest USD 100m or 200m. Thus if an institution wants access to the number one contributor to the GDP of Greece there is no single way to do it. Maybe they can buy shares in Aegean Airlines; but it is not a pure play. If there is no hospitality company trading on the stock market and there is no efficient large operator that somebody can make an investment in, one needs to really create it. There has been an effort to create these institutional platforms. There are some examples but I don’t know how specific you want to get.

We have spoken to the main players in real estate, the REICs, and some of them have a portfolio in hospitality. Could that provide somewhat of a vehicle for investors in tourism?

Mr. Antonio Achilleoudis: One hotelier with a big fund called Oak Tree created an entity that is basically looking towards expanding and institutionalizing hospitality. Grivalia created Grivalia Hospitality and we co-invested with a large institutional investor along with Grivalia itself and its main shareholders in order to create a platform and acquire more hotels. There are these efforts that help in essence to consolidate a very fragmented and often badly managed sector which is highly indebted and one of the biggest problems for the banks. There is further pressure coming from the banks, because up until now, the banks themselves did not have operating solutions. If you look towards taking a property over, you must know what to do with it or else it will continue to lose its value, and so far they have not attempted to become too aggressive as hoteliers. This is now changing because of the pressures the banks are feeling in order to deal with non-performing loans. These will lead towards a more aggressive approach towards hoteliers and now that the banks have solutions, they will undoubtedly seek those solutions from management, ownership or partnership. This will in turn enable them to better control the overall investment. It is not enough to just take control of a property but you also need capital expenditure in order to modernize it so it becomes a better performing asset. That is the other thing because money has been absent for years, even though tourism is coming in and increasing every year, the product is not there.

We are reaching a danger level with places like Santorini and Mykonos. If you do not catch up to the numbers then it will become over crowded and become a bad experience for the visitors. If that happens you effectively take something that had been an amazing experience for tourists and turn it into a nightmare with traffic jams and bad hotels. This will create a poor reputation and undoubtedly backfire. We need private capital to move in and become more institutionalized the way Spain is doing for example. In Spain you have significant hotel chains that have been created and also massive amounts of money that have stepped in to acquire problem assets from the banks. This helps turn them into performing assets and created other platforms for investment. It is a process that has to happen and hospitality is definitely one of the sectors with the greatest urgency, and there are major efforts moving towards that direction with four or five different platforms that are in essence changing the landscape of the entire sector. But it is still in the infant stages and I think that five years from now we will see five or six very dominant companies that will in essence have consolidated. This applies both to the super-high-end, the high-end and the three or four star mass tourism properties. There are a variety of different efforts that are being put in place.

So the opportunities exist. But how easy are they to approach?

Mr. Antonio Achilleoudis: Yes there are definitely opportunities to have higher levels of returns than in other markets, but you need to have local operators and local expertise in order to get there. Looking at Trastor, they want to create a platform that will help acquire commercial real estate. They have done another investment in Greece which was more significant than the shopping malls of Lamda. We advised them to speak to Lambda in spinning off the shopping mall operation since they are a development company. Accordingly there is an opportunity to become the premier real estate development company. They essentially saw that if you can acquire assets and yield levels that are way above the rest of Europe, then you will see improved performance and contraction in capitalisation rates with an investment that is leveraged. In our view that is where a lot of money will be made. But there is still not a whole lot of institutional-grade real estate that somebody can acquire.

Lambda is also the lead developer for Hellenikon which is still pending to be officially launched. However, momentum is building especially since the EuroGroup has identified this as one of the key reforms needed to unlock more funds. Do you feel that the Hellenikon project can open the floodgates for future investment in Greece?

Mr. Antonio Achilleoudis: Yes indeed. Athens is the only European capital city that is not the number one destination of the country. Anybody who comes to Athens is coming for business or for a day and they rush over to the Acropolis and then head to an island. It has perfect weather, the best beaches of any capital in Europe, and truly beautiful clean waters that are only 20 minutes away from the center. It is also the archeological capital of the world. This is how dysfunctional Greece is whereby instead of creating the top destination globally, it is the last destination in Europe in terms of people who want to come and stay. There is no real product. Regarding Hellenikon, it is so intuitive to take one of the most beautiful places, which is now a refugee camp, and complete wasteland for the last 10 years and turn it into an oasis. Thus one can re-start and help convert Greece into a place that can be 70-80% parks for everybody to enjoy. It will include certain developments for people to make money. If somebody invests they do so in order to get a return. But in Greece that is an anathema. If you invest you are a profiteer and are not meant to make money. It is a really backward mentality. God knows why anybody would oppose it but they do. If you are an environmentalist you want somebody who will actually build a Central Park in the center of Athens. But if you walk in there snakes might eat you! That might be good for the snakes but not so much for us. Thus it defies logic.

I left New York and lived there for 25 years, having been born and raised in Cyprus, which has a very different mentality. My mother is from Athens and we always travelled here during the summer, but I still have a hard time understanding certain things about Greece. The mentality of the profiteer is one of them. If you don’t profit you are not going to invest money. So where is the money going to come from? Well now we found out where it was coming from. We did not deserve to get it but we were borrowing it so this led us to the misery that we are faced with today.

Is this better or worse than having an investment that will actually make money employing people for years to come and that the whole country will be very proud of? They fought the Costantanoupulos family when they tried to build a resort in a completely unknown area for many tourists on the Peloponnese. They built a resort called Costanavarino and it took them 20 years, thousands of signatures, while the local communities fought them like crazy. Nevertheless their resort single-handedly saved the whole area because everybody is employed at the resort. Everyone is proud of its beauty and recognize that travel to that destination is attractive.

Of the traffic at Kalamata Airport only 20% goes to Costanavarino. But the fact that the airport was non-existent before Costanavarino is amazing. Thus the economic activity that it created in that little deserted area with the thousands of people who come has had an unimaginable impact. Much in the same way as a project like Hellenikon will have in Athens. It is only twenty minutes from the main airport that anybody can fly from anywhere in the world. Aside from this you have in the Athens riviera Asteras, which is a Grivalia property project which will create a very high-end resort on the coast of Glyfada. The Four Seasons resort at Asteras beach will also be opening soon and Lagonissi which is a bit further down the coast. These will all create a coastline that will get rid of the cafes and nightclubs that have created a wasteland of a coast. We can have a beautiful coastline and instead of seeing kids riding on bicycles you run into drunk people coming out of a nightclub at six in the morning. And I am not saying that this should not exist, but rather that it should be done legally and with the proper investments. So completely transforming that coastline with private capital will totally change the face of Athens. If you look at this triangle between Plaka which has already developed nicely, Syntagma and the Hilton, the Costantanopopulos family and Grivalia have acquired properties with some other investors, then the center of Athens can be truly transformed as well.

There have been studies with a lot of money from the Onassis Foundation that were done years ago about how to transform the center of town, in order to clean it up and make it tourist friendly. Even though I believe in tourism, I think that we are at a point where islands like Mykonos and Santorini could tip over and start backfiring. But tourism in Greece has massive potential in unexplored areas because the beauty is incredible in many different places including Athens. The capital city of Athens has to become a destination because the weather is beautiful ten months out of the year. People should come to Athens to play golf, gamble and hang out for a whole week before catching a two-hour flight to wherever they are going to go back to. This is the potential that Athens has and in my view it would be the catalyst for both GDP growth and a significant increase in quality and numbers as far as tourism is concerned.

The other major contributor will be private capital that can provide a product for islands and places where they desperately need it. Particularly in terms of infrastructure, better hotels and a better hospitality experience than what Greece offers right now. So this is the one sector that is obvious to everyone and I think a great deal is happening behind the scenes with private capital and it might not be obvious to the naked eye. People are focused on Hellenikon because it is a high profile project. I truly think that the Government of Greece and the Prime Minister want to resolve this issue and get moving. It means a lot to create these jobs and move forward.

Let’s talk about investment. You have been involved in all kinds of deals since you have been operating here in Greece. It is clear that international perception of Greece is changing, reflected in the receptiveness towards Greek sovereign debt and record low yields. But regarding Greek corporates when they do their road shows in New York and London, what is the perception of investors? Are they seeing Greek corporations as building competitiveness and being able to fully compete on a global scale?

Mr. Antonio Achilleoudis: Well the crisis forced business people to step outside of their comfort zone. You could be very successful focusing on government contracts or bank lending. Most of them did their listings back in the 90s because the stock market was viewed as having excessive valuation and then it all crashed. Many of them went public during that boom period and stayed public because of that but ran their enterprises privately for all intents and purposes. They were usually controlled by families as well as their corporate governance. Then you would have larger corporations – of which there are a handful – that are run much more efficiently.

The crisis forced entrepreneurs to get out of their comfort zone of government and bank capital and move towards more globally competitive products and services. They needed to export so if there were steel or aluminum manufacturers, the priority was to re-focus on exports because there was no building activity here in Greece and nothing to sell. Some have done it successfully while others have not. We are definitely in a disadvantageous position with factories that have a high cost structure in terms of labor, electricity and energy costs. Thus one had to practically sell at break-even prices or at a loss. They were willing to do it simply to keep the factories working and you had to have the workers there since you can’t just fire everybody. Then they went through multiple re-structuring processes and at this point, some of the more cyclical sectors that rely on building activity like cement, steel, or aluminum have much lower cost structures than they have in recent decades. They are definitely underinvested but there is nothing to invest in, and consumption for those products locally is at levels that we have not seen since the 1960s. At that time Greece was very underdeveloped and a very poor country.

During the crisis we saw in some cases a 70 to 90% decline in demand for certain things and were forced to look outside for new opportunities. If you look at what we discussed earlier in terms of building hotels, infrastructure, and construction activity then undeniably you will see an increase in demand. In some cases going back to 2005-2006 levels but a lot of the cyclical sectors could still see some additional improvement. But they are so indebted that they need significant restructuring and potentially new capital. Obviously that leads to change and not everybody can adapt to that change. Even in that business you will see winners and losers.

Then you have other sectors where they completely readjusted to the new reality and certain people have thrived. They have found the new environment more democratic, economically speaking. In the past if you were going to open a restaurant in Kolonaki, you had to pay the goodwill, in some cases hundreds of thousands just to access the property, and not to the landlord but to the person who was there before. You also had to pay an astronomical rent because somehow the landlord had to benefit from this. Therefore let’s say you wanted to open a restaurant you either had to borrow the money from somebody or from the bank; but the numbers simply would not add up. You might want to profit as quickly as possible, pay the chef a €100 salary, get your return and move on.

Now rents have collapsed so for the same thing that you once paid €12,000-€13,000 a month you now pay €1,000-€2,000 per month. There is no more payment of goodwill and many places are struggling to be rented. Or some people have moved into areas that have less traffic and that is fine. So now you see a more democratic environment because at the same time the chef himself is the one opening the restaurant; he can afford it now with a small loan from some people who believe in him, or maybe the banks but not that much. Thus now the numbers add up and make much more sense, and the outcome is a better quality product. You can transform a country by improving its quality of life and the passion that people have in what they do. Greeks always lack that. The Italians are completely different; they are dysfunctional in many other ways but when they make shoe strings, they are the best in the world and you can sell them to Prada and everybody wants to buy from you. You take pride in what you do and run an enterprise that has hundreds of millions in sales. The Greeks never had that mentality. At this point, the people who are passionate have the ability to take off in the market as entrepreneurs, not simply as just workers for somebody. Athens has some of the best bars in the world as well as really fantastic restaurants that are gaining in popularity and using Greek influenced cuisine to become creative. It is all happening in a lot of neighborhoods where one might have once been afraid to walk. This is being done with people who previously may have only worked as chefs.

I think the crisis transformed Greece in a positive way and these are the benefits that are coming out of the crisis. They are democratising the opportunity that exists in Greece today because it is not a fixed system as it was in the past. In terms of capital also the people we work with are large institutions and although capital does not flow from us to the small businesses; the capital will flow to these creative people you can trust. They will build the business plan and offer an attractive final product. There are some not-for-profit efforts underway to fund small entrepreneurs. One of these is AFI, which stands for Action Finance Initiative. It was originally funded by a friend of mine, a former hedge fund manager in New York. It is a micro finance effort that was put together here in Greece. They give small loans to entrepreneurs and help them build a business plan because the package will go to a bank and the bank will provide the money. While at the same time AFI and its partners in Europe guarantee the loan. There are other efforts like AFI that address the needs of start-ups and entrepreneurs, not specifically aimed at tech but rather people looking to build a real business in the food sector, small industry or similar ventures.

What are your views on the exodus of talent that left Greece following these challenging years? Have you seen any signs of people coming back, particularly the profile of young entrepreneurs like the ones you have mentioned?

Mr. Antonio Achilleoudis: Well yes and no. It is more democratic than it used to be but once you do come back, you realise the obstacles, which are driven by the state that is over-taxing them. Most of the businesses need to find a way around the punitive tax system. It is very difficult for them to survive, let alone profit. At the end of the day they need to make a lot of money so that they don’t work for free. The environment around building an enterprise is hostile and it is unfortunately driven by policies that this government chose because they did not have any other options. They were forced to implement the hike taxes. The mindset of Greek and of a series of parties has been historically anti-business and pro-state with the underlying thinking that if you give all your money to the state they will handle it better. But nobody in Greece trusts the state any more, so at this point whatever you give back to the state either goes to waste, or is returned back to our lenders. It never comes back to you as a taxpayer. Health care and infrastructure is a mess and you get nothing back from the state, which is something that has frustrated the Greek citizenry. Some people who are here might come from overseas and see opportunity but very few will chose to basically come back from their careers abroad in London, New York or Germany, and are not likely to say they are going back to Greece because now it is the land of opportunity.

Many of the entrepreneurs are faced with challenges. Unfortunately choices of how to reform have led a large part of the population to move back into the black market and this is why there is a continuous challenge of collection and meeting revenue targets, now a major issue. We continuously see people that are talented moving out of the country. One of the things that we do at Axia is in each of our offices, we hire senior people to run the divisions. Usually it is from firms in London or New York. But for the analyst or director level, we have an internship programme where after passing some tests, we keep those outstanding performers and gradually build them up. But once they get to the director level almost all of them want to develop their careers and get experience outside the country. Even in this environment that is completely westernized we reward them with bonuses and salaries that are similar to investment banks outside the country. So I cannot begin to imagine how the rest of Greece sees it because if somebody has an opportunity to move out of the country, I would say that seven out of ten, if they don’t have the emotional attachment or family responsibilities, will take the opportunity and run. Unfortunately the people we lose are the best Greece has to offer.

Do you see any of this changing in the not-too-distant future?

Mr. Antonio Achilleoudis: In order for us to create the opportunities the whole system has to completely shift and Greece needs to attract more private capital. There is no real framework in place of how Greece will become more investor friendly.

I would like to invite you now to make some concluding remarks taking into account that through this interview you have the attention of Britain’s business and investor community, readers of The Times. As the founder and group MD of Axia this is your opportunity to share a powerful message with our readers in the UK.

Mr. Antonio Achilleoudis: Well I would basically describe the current environment as a truly unique moment for Greece. We have opposing political parties moving together towards reform; that has never happened before. It is a unique point in time because we have seen massive de-risking of all the sovereign risk that existed for the last eight years, yet we have not seen this being applied in all aspects of the economy and there are still asset classes that have not adjusted at all. I think it offers a unique point in time where investors can access opportunities with much lower risk and in a way that you can actually evaluate an opportunity without these outlying risks that we typically had over the last few years. So as a conclusion, in addition to what I said earlier, I believe that foreign institutional capital will help transform the landscape in Greece because we will team up with great entrepreneurs that are ready to provide a globally competitive product or service. This is very instrumental and I believe that since there is a lack of capital coming from other sources, this is the type of capital that the country needs to be accommodative to and I truly believe it will transform the country over the next five to ten years.