With the acquisition of Goodman Property Investors following the purchase of DEGI, Aberdeen PI has catapulted itself up the investment management league table, keeping true to the ambitious growth strategy it set some years ago. CEO Rickard Backlund speaks to Richard Lowe about strategy and challenges
When Aberdeen Property Investors (API) announced it would be purchasing one of its rivals, Goodman Property Investors (GPI), earlier this year it promised to be the culmination of a complicated series of mergers and acquisitions going back to the start of the millennium. More importantly, it promised to make API one of the largest real estate investment managers in the world.
The history of Aberdeen Property Investors begins in 2000 with its parent company Aberdeen Asset Management (AAM) acquiring Barclays' UK property investment arm along with Celexa, the European property business of Swedish insurer Alecta. Four years later AAM sold the UK and continental real estate business to the fund manager Arlington Securities, while retaining its Nordic real estate business; in 2005 Arlington was bought by the Goodman Group. Thus, the sale of Goodman's property arm to Aberdeen seems a bizarre full circle of events.
The fact of the matter is, however, thanks to the purchase of GPI - along with the acquisition of German open-ended fund provider DEGI in January - API is today one the top 10 global property managers in the world, coming in just above UBS Global Asset Management and JP Morgan. It also makes API the second largest fund manager in the UK, with more assets under management than Prupim, not to mention a strengthened presence in Asia Pacific.
For Rickard Backlund, CEO of API, these latest consolidations represent the next logical steps in a long-term plan to become one of the most significant forces in global real estate investment management.
"We set the target and the strategy some years ago to become a really strong player in Europe," he says. "We also have the ambition to be very strong in each market in which we operate, because market dominance is quite important for the quality and performance you can deliver to your clients, either through funds or the segregated mandates. That is why we would like to create very strong positions in each market where we are established."
API's core activity is managing low-risk pension fund money seeking stable returns from core investments in transparent markets. For Backlund, being owned by independent asset manager AAM - unlike an insurer, like Alecta - has become an increasingly important factor in the business' success, because clients can safely assume their capital has as much priority as any other under management by the firm.
"To be owned by an independent asset manager is a very good platform to operate from," he says. "We don't have our own investments, we just need to take care of other people's money and do that very professionally. Every source of money is equally important for us, so we can play with the same rules for all money and we don't have our own pocket of money to manage."
API's core business has historically been about managing separate mandates for pension funds. Looking back to 2004 it is possible to see this represented its entire business at one stage. However, in that year API initiated its fund and fund of funds (FoF) businesses, which began to see assets under management in 2005. During 2006 and 2007 both these sections of the business began to make up a greater role.
In particular, API's FoF platform has continued to grow at a significantly steady pace since its inception. But the purchase of GPI will see this side of the business suddenly expanded. "We have brought together API's and Goodman's indirect businesses and created what must be one of the strongest global indirect property businesses," Backlund says.
It will be interesting to see how the two platforms, which looked to be direct rivals until now, will be amalgamated. There is certainly a degree of overlap where both Asia Pacific FoFs are concerned and API has revealed it is "currently reviewing all options with clients" in the Goodman Asia Pacific product. However, the situation is clear regarding the European vehicles.
"The fund of funds products within the combined business are generally complementary, as are the lists of investors in those products," Backlund says. "The acquisition of GPI adds a UK FoF to our indirect fund range, while the European FoFs managed by Aberdeen and GPI are different; the ex-Goodman fund invests mainly in funds that offer exposure to Eurozone countries, while the Aberdeen funds offer broader European coverage and a different investment profile."
Does Backlund expect the FoF route to continue to grow in popularity among investors? "The big players maybe don't need the FoFs, because they can go in and create the diversification themselves. But there are a number of smaller and mid-sized investors that absolutely will need these types of products to get an Asian exposure, for example, and to immediately gain diversification and access to a professional team in Asia." And the long-running debate concerning FoF fee structures is clearly not deemed a major issue. Backlund believes the benefits of investing in FoFs justify the cost, especially in such regions as Asia Pacific where these vehicles can offer access to 10-15 funds, selected by teams on the ground who are able to exercise the necessary due diligence.
"That is something that naturally investors need to pay for. For many, they cannot achieve it in another way and so it will increasingly become more popular. We see the need for diversification, the need to enter into other markets, is increasing continuously."
As mentioned, API's direct fund business has grown organically since 2005 and the acquisition of DEGI earlier this year has boosted it even further. But this merger also strengthened API's position in Germany, which in the past had been limited to an operation in Cologne focusing entirely on raising German institutional capital to be invested in the Nordic regions. Now, with DEGI on board, API has set about establishing a completely different platform for the German market to collect money both from institutional and retail investors. "Bringing in DEGI we created a very strong presence in Germany and a platform for bringing in more money," Backlund says.
The DEGI funds are also benefiting from their new owner, because API is enabling them to have a local presence when they invest outside of the German market, he says. "The DEGI products invest outside Germany, but they had a philosophy to do that from Frankfurt. We are changing that philosophy so it is done through local teams. You need to have presence in the asset management - that is important."
Following the DEGI acquisition, API had a strong standing in the Nordics and continental Europe. But, as Backlund explains, there was still a missing piece of the jigsaw: the UK. Although API already had a small UK team in place, the integration of GPI will create a much larger presence in the market.
This is potentially very good timing given the position in the cycle the UK real estate market currently finds itself in. API has held back the launches of proposed UK funds because of the current market situation and Backlund admits that the UK team (which was brought in at the beginning of 2007) has had limited opportunities to work with. "The market has been quiet and it hasn't been possible for them to do very much," he says. But with the UK market looking close to fair value for some commentators, now is a good time to have the right resources in place to take advantage of a bottoming-out. "That is why we think it is the right time to acquire Goodman now," says Backlund. "It will take a couple of months to consolidate, but then we are well prepared for when the market is recovering in the UK."
At the beginning of 2008, API announced that it was planning to launch a UK fund before the end of the year. But this was not yet another "opportunity fund" looking to pick up distressed assets, rather it was a sustainable fund that would look to exploit arbitrage opportunities arising from the introduction of energy performance certificates.
The strategy is based on the potential for the new legislation in the UK - which grades buildings on their energy efficiency - to create a situation where properties go out of favour with both tenants and investors, and as a result suffer a pricing reduction. The key is to identify those assets suffering from a price reduction that could also be brought up to a higher standard at a cost that is profitable.
But what will happen to projects like this now that the UK team is undergoing significant change? That will depend on how the newly enlarged team decides to proceed after what is likely to be a fairly intensive series of meetings during the summer months.
"We are bringing in a lot of competence and knowledge and ideas from Goodman, and we will mix that with our former view for the UK. We are going through that exercise and I think by early September we will have formed a strategic plan for the UK."
Despite renewed interest in the UK emerging among global investors, Backlund expects Asia to continue to attract the most interest. The purchase of GPI has also strengthened API's presence in the region.
"In API we had three people in Singapore executing for the Asian FoFs. For Goodman's Asian FoFs they have two people in Sydney and two people in Hong Kong. And thirdly, DEGI has invested in South Korea and has been looking into direct investments for its international fund in Japan, and later on in China as well. These are the three smaller pieces we are bringing together and we are looking into how we should then develop the Asian organisation. But we are preparing ourselves for being able to have people on the ground for direct investments in Asia as well."
However, Backlund admits API is in no hurry to develop its capability to invest directly in Asia Pacific, despite the ongoing rush of capital chasing investments there. Europe remains the priority in the first instance. "We are taking our time," he says. "First we consolidate the organisations here in Europe and then we set a strategy for Asia."
API's recent expansion could be seen as somewhat brave given the current uncertainty in the real estate markets and wider capital markets, as the global financial system works through the credit crunch and the US threatens to spread global recession.
Backlund admits API's main investors, pension funds, are "concerned and are trying to follow that". But "they still like property," he adds.
"We haven't seen a trend that they would like to reduce exposure to property. We see an underlying trend to increase property exposure is probably there - maybe not at as an aggressively increased pace as we saw one or two years ago, but they still have on their agenda to increase property exposure all the time."
And it is that willingness to remain committed to real estate that will undoubtedly help the asset class in times of discomfort like today. "Even if they are not pumping in new money, there is still new money coming in. We don't see the opposite trend at all. It is really the long-term investors - those managing pension money, life money and so on - that are around investing," Backlund says.
"Maybe they are a bit more cautious right now and take more time with their decisions, but they are around. The 95%-geared players are not around any more. That to some extent creates opportunities for us. One and a half years ago it happened fairly often that we were out-competed by more aggressive players. But they are not around right now and we are happy for that."
