Consolidation in fund management continues apace, as the importance of scale and global reach is felt. Christopher O’Dea reports
Mergers and acquisitions (M&A) in the real estate investment management industry appear to come in vintages. The most recent crop of M&A seeds came to harvest during 2014, and the yield is mixed. It includes stronger specialists and a new contender for the industry’s top tier.
Some managers with specialised expertise in a sector or region have strengthened their position by creating new entities that enable them to launch new products and undertake bigger joint ventures. Global investment giant BlackRock quietly executed and absorbed MGPA to bolster its real estate presence in the Asia-Pacific region.
Perhaps the biggest imprint on the industry was made by TIAA-CREF’s joint venture with Henderson Global Investors, resulting in the creation of a diversified global real estate platform that has more than €56.6bn in assets under management – a few large mandates away from breaking into the top three in the world.
Like farming, the success of investment industry mergers depends on a wide range of variables. Underlying most of the deals was the need to address some common themes facing property investment managers: the need to offer cross-border investing capabilities, supported by research; demand from investors for co-investments; and the need to deliver integrated services, such as treasury management for debt held within fund structures. Managers need access to capital that can be deployed in co-investment deals, or be able to attract strategic partners with operating expertise that can create an edge in a certain sector or region.
According to Morningstar Equity Research analyst Stephen Ellis, these are critical themes for alternative investment – including real estate – managers. In recent reports on alternatives managers, including The Carlyle Group and Blackstone, Ellis notes that institutional investors, particularly pension funds, are generally seeking to cull their manager lists, sometimes by as much as two thirds. Increasingly, institutional clients are consolidating relationships with firms that offer a wide menu of specialised funds and customised strategies.
While mergers and joint ventures typically result in bigger firms, it is not size per se that clients want. “That is where the industry is heading,” says James Darkins, CEO of TIAA Henderson Real Estate. “But clients don’t buy ‘big,’” he adds. “They’re really indifferent to that. They buy investment performance, they buy capability, and they buy client service.”
Keeping existing talent in place – and augmenting it when necessary – is one way to ensure that performance and client service are consistent following a collaboration. This is what La Française and Forum Partners Investment Management have sought since entering a strategic partnership last September. Since its formation, the partnership has also concentrated on retail property and several European markets.
At the time, La Française managed assets of $50bn (€39.2bn), with $9bn in real estate, while Forum managed $5.7bn, including global opportunistic and listed property strategies. La Française took a 24.9% stake in Forum Partners through an issuance of new shares, and – with its parent Crédit Mutuel Nord Europe – invested over $600m in its global range of real estate investment strategies.
The resulting platform took shape in 2014. The group’s initial transaction was the acquisition of Cushman & Wakefield Investors, the investment management business of Cushman & Wakefield. Jointly owned by La Française and Forum, with 66.6% and 33.3% shares respectively, the new business operates as La Française Forum Real Estate Partners.
But aside from the name, little has changed. The new entity retains Cushman & Wakefield Investors’ CEO David Rendall and managing director Jens Göttler, along with their team to manage the business and investments. The unit invests in direct and indirect commercial property through core and core-plus strategies, for clients in the UK, continental Europe and South Korea. The investment team concentrates on the French, German, UK and Swedish markets, running just over $1.2bn of assets.
The PURetail Fund – a joint venture with Scottish Widows Investment Partnership (SWIP), which is now part of Aberdeen Asset Management – is a closed-ended real estate fund focused on urban retail assets in France, Germany and Sweden. In September, LFF Real Estate Partners extended further into the retail sector by launching a UK shopping centre fund targeting £500m (€641m) from investors. In the manner of private equity firms that bring in operating executives with specialised industry expertise, LFF will work with retail asset management company Realm, which manages more than 2.5m sqft of retail and leisure assets in the UK, mainly for institutional investors.
Property bright spots
Property stands as one of the bright spots in Aberdeen’s acquisition of SWIP last year. In the first half of 2014, Aberdeen’s property unit garnered net inflows of £888m (€1.12bn), on gross inflows of £1.45bn. It was the only asset class in which assets under management increased – during a period when Aberdeen suffered outflows from its core equity business.
Aberdeen’s real estate business, which is about 8% of its AUM, remains centred on the UK. Nearly half of its real estate AUM are in UK mandates and nearly 60% are domiciled in the UK, according to June 2014 figures. Martin Gilbert, CEO of Aberdeen, said in the company’s August trading update that it was “encouraging that our marketing focus on non-equity products is gaining traction, particularly in terms of property and emerging market debt.”
Gilbert is counting on property as a positive future contributor. “We continue to see healthy interest from investors,” he said. With over £24bn in property assets managed, Aberdeen is a sizable manager, but – in light of recent industry consolidation – it ranks as a mid-sized player in a sector where institutional clients are increasingly looking for global platforms or best-in-class expertise in a region or property type. And the property unit is part of an equity-sensitive fund management business that is being buffeted by a resurgence in market volatility not seen since 2011 at the height of the euro-zone debt crisis.
With more than 36% of property assets invested in the Nordic region, Aberdeen enjoys a comparative advantage there. And it has capitalised on that strong position. In September, the Aberdeen European Secondaries Property Fund of Funds became the first dedicated real estate secondaries fund to close in 2014, according to Preqin. The fund, which was announced last October, raised €300m to acquire 15 Europe-focused fund interests to gain exposure to over 200 assets in Europe. With Sweden’s SEK240bn (€27.7bn) Första AP-fonden (AP1) pension buffer fund acting as lead investor, the fund leverages Aberdeen’s strong Nordic relationships.
The secondaries fund is being managed by Aberdeen’s multi-manager team, which manages approximately €2.5bn of European multi-manager mandates – it has made over 100 investments in property funds in Europe and sits on advisory boards at more than half of these. That unit is not technically part of the property business. In September 2013, Aberdeen moved the property multi-manager team from the Property unit to its Solutions business.
A major reason for TIAA-CREF and Henderson forming TH Real Estate was the complementary nature of the locations in which they invest, says Darkins. “There was a very neat geographic fit between the two organisations, TIAA having the US as its home base and small outpost in the EU, and Henderson with the UK as its base and small outpost in the US.”
TIAA-CREF holds a 60% interest in TH Real Estate, and Henderson holds a 40% stake. The new company has “real bench strength in the US and Europe and a shared vision to continue growing our fledgling platform in the Asia-Pacific region”, he says.
The other factor was capital. “Henderson’s property team was very much a fund manager only. It didn’t have capital that it could invest alongside its clients, and it’s an increasing demand of clients that the managers advising them are co-investing along with them,” says Darkins. The result is a $77bn real estate investment organisation with global reach, says Tom Garbutt, senior managing director, head of global real estate, TIAA-CREF and chairman of TH Real Estate.
A research team is being built in Asia, with a member of the TH Real Estate London team being seconded to Singapore to facilitate the process, while TH Real Estate has brought in a seasoned real estate executive with experience in Asia to build its marketing, product development and client-facing organisation in New York. “We are running this as a global enterprise,” says Garbutt.
Cost savings and the disruptions that arise from consolidating personnel and systems were not factors in the formation of TH Real Estate, so the team could set about pursuing opportunities from the outset. “There was nothing in our strategic case about realising cost synergies,” says Darkins. “It was all about realising revenue synergies from sharing clients, from sharing know-how and expertise,” says Darkins. “We agreed the important thing was that we have a globally consistent shop window presented to our clients.”
An initial example of TH Real Estate broadening its global reach is debt, where TIAA-CREF has a strong reputation. “The team at Henderson had no track record in that field,” says Darkins. Under the alliance “what we’ve been able to do, with a combination of local hires here in Europe and know-how from the US, is build that platform here in Europe as well”.
And in Australia, where Henderson has an office to help Australian clients invest in Europe, TH Real Estate is investing TIAA-CREF capital in the Sydney office market, in conjunction with Australian publicly-listed Mirvac Group.
TH Real Estate also recently acquired a 75% share in a shopping centre in Brisbane, as part of a co-investment arrangement with Federation Centres, a local property firm that has taken a 25% stake. “I’m confident you’ll see us bringing other clients into that market,” says Darkins. “We’ve got a really strong pipeline, and capital to invest for TIAA and other clients.”
In fact, says Darkins, clients of TIAA-CREF that had not previously invested in property are expressing interest in the new alliance. “We are now in discussions with significant TIAA-CREF clients in Sweden and South Korea about major projects,” he adds.