The merger of ING REIM and CBRE Investors has created the world's largest real estate investment manager. Richard Lowe speaks to Pieter Hendrikse and Matthew Khourie, and explores what the merger means for investors and the fund management industry
You can always rely on financial crises and market downturns to produce a number of symptoms: correlations will rise; investors will lose money; long held assumptions will be re-evaluated; a select few investors will take advantage of others' turmoil. Another is consolidation. Once the full severity of the latest crisis - one of the worst in living memory - became apparent, consolidation in the real estate fund management was viewed almost as an inevitability.
But similar assumptions were made about waves of ‘distressed assets' coming to the market. The latter never really materialised, as banks held off from foreclosing on swathes of property and famously entered into the practice of ‘extend and pretend'. However, recently the real estate fund management sector lived up to expectations and experienced what is possibly the biggest consolidation feasible.
The industry now has its new Goliath and it is a truly global beast. A least it will be once CBRE Investors and ING Real Estate Investment Management is fully integrated. Combined, the two businesses account for $97.4bn (€71.1bn)of assets under management in 102 funds and 59 accounts, making the new merged entity the largest manager in the world ahead of AXA Real Estate Investment Managers.
The fit is almost uncanny: the majority of CBRE Investors' business comes from investors based in the Americas through separate accounts ($10bn) and through value-add and opportunity funds ($6.3bn); the lion's share of ING REIM's assets under management are in core/core-plus funds in continental Europe ($19.2bn) and global real estate securities ($17.6bn).
Where there would have been overlap is with ING Clarion Partners, which manages non-listed real estate investments in the US. But this has been sold separately to private equity firm Lightyear Capital. The only other area of overlap relates to both firms' global multi-manager operations. ING Real Estate Select has the greater volume of assets under management ($6.5bn), compared to CBRE Investors' $4.1bn, but the new merged operation will be led by the CBRE Investors' head of global multi-manager Jeremy Plummer, while Jan Meulenbelt, global head of ING Real Estate Select, will have a leading role in the integration process.
Matthew Khourie, chief executive at CBRE Investors, explains the objective of the merger as a whole is "to take the best talent and best practices" from the two companies and combine them. He says the firm that eventually rises from this merger will be a "fully integrated" one, rather than an organisation with the vestiges of two separate firms under the same banner.
The integration is expected to take somewhere in the region of six to eight months. In the meantime, Khourie says, it is very much "business as usual" for clients of both ING REIM and CBRE Investors. "We have set up a separate integration team," he says, enabling asset management and investor relations teams to continue to "focus on their clients 100%".
Pieter Hendrikse, chief executive for Europe at ING REIM, says that investors were communicated to exactly one minute after the merger announcement was made, providing them with pre-prepared material to explain what was happening. Over the subsequent 72 hours, Hendrikse and Khourie, who flew to Europe from the US, have been meeting and talking with existing ING REIM investors.
Hendriske says the reaction has generally been positive, particularly because ING REIM is selling to what is fundamentally a real estate company in CB Richard Ellis, rather than a financial institution. CBRE, the parent company of CBRE Investors, has the cash to carry out the transaction without relying on additional financing. Hendriske says that the majority of investors recognise that they are at a good point in the market cycle, coming out of the global downturn, and that the new company - and by extension its investors - will be in a good position to take advantage.
It is not as though the news will have come as a big surprise to investors. It became widely known that ING was in the market to sell its real estate fund management business, and more recently CBRE was being tipped to be the successful bidder. Perhaps the biggest vote of confidence for the merger manifested itself in the ability of ING REIM to raise more capital for its funds over the past 12 months, including its multi-fund European Property Strategy and its European Shopping Centre Fund. The other vote of confidence comes from the new 10-year investment management contract signed with ING Insurance, the largest client of ING REIM, which was part of the merger agreement. "It is an endorsement of how well ING REIM has managed the account," said Khourie.
The merger is a meeting of minds in more ways than one. Khourie points out that both firms are "very heavily research-driven" and subsequently the new company will be able to call on an unrivalled research team. He says it will also have a leadership group that is "second to none". But perhaps what is even more important in this respect is the fact that both sets of investor clients are based predominantly on opposing sides of the Atlantic. Hendrikse, who was responsible for founding the European Association for Investors in Non-listed Real Estate Vehicles (INREV), sees an opportunity for a cross-pollination of ideas and approaches among the global investor community. He is keen to show North American investors how European investors operate and how they benefit from the best practice guidelines set up by INREV.
Both Hendrikse and Khourie recognise that there will always be differences between US investors and their European counterparts - not to mention Asian investors - in terms of their individual requirements and perspectives. But there is a sense in the market that global investors are moving to a more harmonised and consistent culture of best practice. The industry is entering a "new paradigm", Khourie says, and investors are demanding change.
There will be a convergence among global investors in many respects and arguably the financial crisis has provided the necessary catalyst. The organisation born out of the merger between CBRE Investors and ING REIM will be in a very good position to spearhead that convergence.