There is more to the marriage of TIAA-CREF and Henderson than simply building scale, writes Richard Lowe.

Size matters. But it’s not necessarily the most important factor for real estate investment managers today.

Consolidation in the sector is often interpreted as a means of building instant scale and grabbing market share. While this is often true, mergers and acquisitions are not always just about becoming the biggest kid on the block.

The announcement by Henderson Global Investors and TIAA-CREF to join forces to create the fourth-largest real estate investment management business is a case in point.

If the purpose of the coming together were purely about scale, perhaps TIAA-CREF would have not opted to keep its North American real estate business separate (structurally but not strategically) from the new joint venture. TIAA Henderson Global Real Estate will comprise 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.

Both entities will work closely together, united by a global distribution and client service organisation. But TIAA Henderson Global Real Estate is a 60/40 joint venture, with TIAA-CREF taking the majority share, rather than a clean merger.

Both organisations stand to benefit from the partnership. It will mean TIAA-CREF, the US financial services firm and provider of retirement funds, will have a more compelling European real estate proposition for its investor clients.

TIAA-CREF recently opened an office in London, making its European ambitions clear. According to IP Real Estate’s most recent real estate investment manager survey, only 8.9% of TIAA-CREF’s real estate assets under management were held in Europe last year. Henderson has much more established presence in Europe and has built a strong reputation over the years, especially in the retail property sector.

But, equally, TIAA-CREF has something that Henderson does not: access (potentially) 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.

By contrast, Henderson Global Investors, which is part of the publicly listed Henderson Group, has long marketed itself as a “leading independent” asset management firm. Unfortunately, since the financial crisis, the market for raising capital for real estate funds in Europe has been difficult. Some of Europe’s largest cornerstone investors have steered away from funds in favour of more direct deals, while the ‘blind pool’ fund model has fallen out of favour almost universally.

Of course, Henderson has continued to demonstrate it can win new business in the area of separate accounts, most recently in the form of a mandate to invest in UK retail on behalf of the AUD60bn (€42.3bn) AustralianSuper. James Darkins, managing director at Henderson, estimated that the real estate businesses of Henderson and TIAA-CREF shared around “half a dozen” investor clients, also including another Australian institution, the AUD85.2bn Future Fund.

But the emerging real estate debt fund sector in Europe provides a good case study. Where European debt funds have been launched successfully, it has invariably involved some form of in-house capital. The likes of Axa Real Estate and M&G, for example, have been able to get investment strategies off the ground by having access to parent insurance capital (albeit not guaranteed) with which to build up a track record and attract other investors.

Henderson was heavy in its marketing of its intended move into the real estate debt funds business. It launched two debt funds – one senior, one junior – but their success was predicated on the ability to raise capital for what were brand-new strategies in a risk-averse environment. John Feeney, who was hired to lead the debt business and who has since left to rejoin the banking industry, could claim to have a track record in real estate lending. But Henderson, as an investment house, could not.

TIAA-CREF can point to a long-running real estate debt tradition in the US (it made its first commercial mortgage investment in 1934), and it has been public about its interest in trying to replicate this in Europe. Last week, it was revealed that Catherine Webster, a former Lehman Brothers executive director, had been hired to carry this out.

During a media conference call on Monday, neither TIAA-CREF nor Henderson would confirm whether Webster would lead TIAA Henderson Global Real Estate’s debt business. But Darkins, who will become chief executive at TIAA Henderson, and TIAA-CREF’s Tom Garbutt, who will become chairman, said they were “excited” about a debt strategy they had been formulating.

But the most important thing is that this European debt strategy will be designed to appeal to TIAA-CREF’s biggest institutional client. Unlike Henderson, TIAA Henderson will have its in-house cornerstone investor to help get new strategies – including debt – up and running, with which it can then attract further third-party capital.

“We do have the benefit of one of our significant clients, which is TIAA, the insurance company,” Garbutt said. “We do have a global investor there that is fairly prolific and a long-term investor. We will have the opportunities as strategies present themselves to bring TIAA into opportunities to invest alongside investors, which is a very attractive value proposition for our clients. You’ll see that happening in different parts of the globe over time for various strategies.”