Mergers and acquisitions have been slow but steady, most recently with US managers making deals in Europe, writes Maha Khan Phillips
BlackRock, the world’s largest investment manager, announced in October that it had completed its acquisition of MGPA, a real estate investment manager with a presence in Asia Pacific and Europe. The merger created a global real estate investment platform with approximately $23.5bn (€17.9bn) in assets under management.
The deal is one of a slate of recent mergers and acquisitions, which began during the financial crisis, most notably with CBRE’s acquisition of the real estate business of ING Group for $940m in 2011. That integration created a real estate asset management business with approximately $100bn in assets under management,
but was a different proposition to some of the deals happening in 2013. Like many banks, ING wanted to get out of the real estate business. MGPA, which was majority owned by Macquarie Group, was not under any pressure to sell its business.
According to one adviser, it is an opportunity for BlackRock to build up a real estate franchise in Asia and continental Europe. “The MGPA deal fills a lot of holes in
BlackRock’s capabilities,” he says. “It was also a good fit from an asset class perspective.”
But there is a suggestion that BlackRock will have to be careful about retaining entrepreneurial talent. “BlackRock will have to work hard to retain MGPA’s fund managers, because it is an opportunistic funds business, which is a skilled strategy where reliance is placed on a few key individuals,” the adviser says.
BlackRock was not available for comment, although, in a recent announcement, Jack Chandler, the firm’s global head of real estate, said the new business housed “some of the most talented and experienced real estate investment professionals and most attractive funds in the industry.”
The largest deals this year have been about managers – primarily US managers – wanting to extend their global reach. “American managers are clearly seeing an opportunity to get access to broader markets,” says Colin Barber, chief executive officer of Indirex, the information exchange for unlisted real estate.
Alex Moss, managing director of Consilia Capital, the London-based boutique advisory firm that specialises in implementing real estate strategies for corporate and institutional clients, believes the trend is a reflection of the fact that people need global reach to have full product offering, and they also need scale to lower costs enough to be able to pass on at the fund level, as investors want better fee structures. “A lot of smaller to medium-sized players probably have medium-to-high overheads relative to the size of the fund, and there is plenty of downward pressure on fees and costs,” he says. “Understandably, in a low-return environment, people are very focused on managing fees. The way you get your fees down is to be larger and have economies of scale.”
Another key issue is the attractiveness of Europe as a region. “Many of the concerns about Europe have subsided and people feel that they can get returns out of Europe that they just can’t in the US or Asia. A lot of managers in the US are teaming with a European operator, or buying a European platform, and some are doing both,” says Samantha Lake Coghlan, real estate funds partner at Goodwin Procter. “We can see that from transactional activity, especially being part of a US firm. There is money coming across, whether it be for acquisitions of operating platforms or just for investment purposes.”
Others make a distinction between deals that are expansion, such BlackRock/MGPA, and those that happened because a business had to be sold, such as ING/CBRE. The wealth of funds launched between 2005 and 2008 are only now approaching expiries, triggering activity in the market as fund managers face risks, and fund run-offs.
“I would split the corporate deals we have seen since 2008 into those that were primarily motivated from a defensive perspective and those that were more offensively orientated,” says Austin Mitchell, head of global business development at Henderson Global Investors.
“There haven’t been as many of the former as you might have expected because of the timing issues, but I would expect them to become more prevalent as the impact of investors voting with their feet is felt.”
One industry commentator suggests that it is these more defensive integrations that will have the largest problems creating a sustainable brand. He says there were teething problems in the CBRE/ING merger. “Even though CBRE took over ING’s team, it was a reverse take-over in a sense,” he says. “The ING team had the dominant franchise and the dominant brand, although in the UK the CBRE team was dominant within the multi-manager team. It really did vary, but there was a big cultural clash, and it changed from team to team.”
That deal has long been put to bed, and Pieter Hendrikse, chief executive EMEA for CBRE Global Investors, says the teams had very little overlap in client base, and the right chemistry, and that the firm has been successful in merging into one culture. “The move from ING to CBRE, with CBRE welcoming ING’s expertise, has been extremely successful,” he says. “We have developed a new handbook for merger integration. Why can I say so? We had a clear view and vision of what we wanted to achieve.”
Hendrikse sees more consolidation on the cards. “Even though the immediate stress has disappeared from banks and balance sheets, I still think banks and insurance companies are not going to keep their investment management or real estate units in the long term, because it is just not a core business,” he says.
As markets pick up, expansion into new markets will increase. According to new research conducted by Preqin on behalf of State Street, 12% of fund managers are planning to acquire another business in the next five years; this compares with 7% that have already done so since 2008.
Furthermore, 32% of real estate managers plan to expand their businesses in the next five years by moving into new regions. One in four real estate managers plans to enter into joint ventures with investors, and 35% have already done so since 2008. Real estate managers are also refining their products and investment strategies, with a third planning to offer new investment strategies over the next five years. Preqin conducted its study in July 2013, speaking to 391 respondents from alternative fund managers globally.
Creating the ‘fourth-largest’ manager
In June, Henderson Global Investors and TIAA-CREF announced that they were creating the fourth-largest global real estate investment business through a new joint venture. TIAA Henderson Global Real Estate comprises the European and Asian property businesses of both parties, while Henderson’s US property business will be subsumed into TIAA-CREF’s North American business.
“We wanted to reposition our business by becoming more global in orientation, adding to our capabilities in North America and Asia Pacific and increasing our ability to align interest with those of our investors in terms of capital,” says Mitchell, who sees more US capital coming to the market, but also says there is a rationale for European managers to integrate with US players.
“Many of the deals that happened this year in Europe have involved a major US player. I don’t think that is a coincidence,” he continues. “I think this industry is seeing that its clients have much more of a global outlook than five years ago. Investors have been making lower allocations to European closed-ended funds. We estimate that less than 20% of global capital for closed-ended funds has gone to Europe in the last three years, with North America and Asia Pacific attracting the majority. Channels never get completely turned off, as there are always asset-driven opportunities, even in ex-growth markets, but as a manager we see global investors making significant regional allocation calls.”
TIAA-CREF offers Henderson access to a deep pool of parent capital. The asset management arm of TIAA-CREF invests on behalf of third-party investors, but its biggest client is the insurance company that serves millions of active and retired employees in academic, research, medical, and other non-profit fields.
Both parties also have aspirations for growth in Asia, and TIAA-CREF brings its commitment and experience in real estate debt investments to the table, which is another major focus for both firms.
“We were conscious that we had to be careful about the identity and fit with any potential partner,” says Mitchell. “We didn’t want to increase our access to capital [if it meant working] with a partner who didn’t share the same values, strong reputation, and sense of integrity. We wanted a partner who understands real estate and had an existing strong reputation and understanding of the market.”
In July, Henderson also acquired Horizon Investment Management in France, to gain a greater foothold in that market.
This year, French asset manager La Française AM and global firm Forum Partners entered into a strategic partnership as well, with both companies looking to expand their activities in other European markets. Patrick Rivière, CEO of La Française, says the firm has spent the last three years opening offices in Luxembourg, Milan, and Madrid to target institutional investors. After successfully selling core products outside France, Rivière says it wanted to expand its product offering, and started talks with various potential partners.
“Forum is a good partner for us as they are very complementary in terms of international real estate investment capabilities, such as private equity, mezzanine debt, and REITS, whereas La Française has been focusing on direct real estate investments and senior debt,” he says.
The managers are looking to set up a new senior debt fund by the end of 2013, and to launch it in January 2014. Rivière says the firm is in discussions with institutional clients to shape the risk-return target.
Not all consolidations or joint ventures are going to be successful, though. Towers Watson monitors whether any acquisitions are a distraction to senior management.
According to Paul Jayasingha, senior investment consultant, the consultancy normally starts looking at mergers with a degree of scepticism. “Typically, lock-ins are put in place and there can be a whole lot of incentives that keep people where they are for a period of time,” he says. “But it requires monitoring. There is often a management reshuffle, and new, operational, marketing and administrative functions. This all requires monitoring from a research perspective.”
Other managers will have to work out how to position themselves in the market, as it becomes increasingly global. Moss says: “There is a division between the larger scalable fund managers with a larger product range, like BlackRock, but similarly there is still an appetite for smaller boutique-style managers that do well. And it is the people in the middle that get squeezed.”
People often talk about a ‘squeezed middle’, but Lake Coghlan believes that trends in the market will make this even more apparent. “You’ve got a whole polarisation of the industry,” she says. “The big boys who have always done fine will continue to do fine. But those in the middle without a unique strategy will have to shift, because they aren’t differentiating themselves and they can’t deal with the increasing operational costs from the growing compliance burden, especially since they don’t have the economies of scale.
A lot of niche players with specific strategies are benefitting from tying up with the larger players.”
But while consolidation looks set to continue, it will not happen overnight, according to Jayasingha. “If you look at the rationale behind some of the recent mergers, it is about a firm who is strong in one geography trying to build out its capability in another geography,” he says. “If we think about acquisitions generally, unlisted real estate is not as scalable as equities and bonds. Assets are unique, and it is not as easy to scale an unlisted property platform. That’s what makes the consolidation in the real estate industry less rapid than it has been for some other asset classes.”