KKR has broken into the Top 100 following several years of growth, mainly in the US. The ambition for Europe is just as strong, finds Richard Lowe
After 19 years at LaSalle Investment Management, including a long stint as European CEO between 2007 and 2019, Simon Marrison retired from the business this summer – before joining KKR as senior adviser for real estate in Europe.
The move turned the European real estate market’s attention to KKR. The US private-equity house is large (it has $222bn (€188bn) in assets under management) and long-established (it was created in the 1970s), but its real estate arm is relatively new, having been set up nine years ago with the appointment of former Goldman Sachs real estate guru Ralph Rosenberg in 2011.
This year, KKR’s real estate outfit grew to more than €10bn in assets under management, bringing it into the Top 150. The majority of that is in the US, through the creation of value-add funds, property debt vehicles and an open-ended core-plus fund (see table). But KKR has ambitions to replicate its US platform – which features value-add funds, debt vehicles and an open-ended core-plus fund – in Europe and Asia-Pacific.
Marrison says he was attracted to that ambition, the vision and the team culture. “There was a click and a desire to try to find something where Guillaume [Cassou] could leverage my experience and strengths,” he says. “We talked a lot about investment philosophy and we were totally aligned on that philosophy.”
Cassou, another former Goldman Sachs executive, joined KKR soon after Rosenberg, in 2012. He was given the task of building up the European real estate business, which raised more than US$700m for its first fund in 2016, and is understood to be on the road fundraising for its successor (KKR declined to comment on fundraising).
The focus at the moment is on developing the European value-add funds business. Recently, KKR has been investing in, among other things, European logistics through the Mirastar platform, in which it acquired a strategic stake from M7 Real Estate earlier this year.
But its wider activities in the US have paved the way for similar moves into core-plus real estate and property debt in Europe. “They feed off each other,” Cassou says, suggesting it would give KKR “the ability to do more transactions across the risk spectrum”. He says: “It means that you see more, you do more… what is more likely over time is we try to replicate that model in other parts of the world.”
However, KKR is not rushing into it. “We don’t know if it is going to be six months down the road or three years down the road,” he says. The focus is growing the business “in a measured way”, by creating a limited number of focused vehicles, rather than pursuing a proliferation of funds and strategies.
“The beauty here is we would be coming with a clean slate,” Cassou says. Many established core-plus vehicles have legacy exposures and portfolios that need reweighting. “Take an obvious example – retail,” he says. “Most of the core, core-plus vehicles have too much of retail, and by bringing a new vehicle we can hopefully avoid some of the pitfalls others have faced.”
The addition of Marrison could certainly be seen in the context of KKR’s ambitions to diversify. LaSalle has well-established funds in both arenas. But Morrison points out that, when he joined LaSalle in the early noughties, LaSalle’s European platform was very much a value-add business.
For now, KKR will continue to pursue opportunistic and value-add investments. Seb d’Avanzo, who joined KKR in 2016 and is head of acquisitions in Europe, says most investments focus on one of three themes – digitisation, the shift from home ownership to renting, and the increased mobility of people around the world.
“You do need to have an extra level of conviction and an edge relative to your competitors” at times like this, d’Avanzo says. “A purely opportunistic approach is very challenging at the moment,” he adds, thus the importance of keeping a focus on sectors and themes.
“What we’ve found is that by staying focused and by using the ecosystem that we have within KKR – to gain better knowledge, better understanding of those trends – we’ve successfully deployed and… started exiting on those investments,” he says. “As a result, what we have now is a very nice position in the market where people know that’s what we’re focused on, and so as a result pipeline is strong and we’re able to keep investing behind those themes.”
Logistics – which is tied to the digitisation theme – has obviously done well during the COVID-19 pandemic. But he points to another example – the burgeoning rented-housing market in Dublin. Many real estate investment managers have moved into the private-rented sector in the UK and Ireland, but d’Avanzo says KKR wanted to do it in a more “creative way”, creating a credit platform for developers that is generating high double-digit returns while being positioned in a less risky part of the capital stack. “Within the team, within the firm, we have the toolkit to look at things in a slightly more creative way than perhaps others can,” he says.
What about distressed situations that are likely to arise from the COVID-19 pandemic? Cassou says KKR has ambitions to take part, but he says the company will not be buying up non-performing loans. Instead, the focus will be on recapitalisation and buying debt with a view to gaining control and ownership of underlying real estate.
The hospitality sector, which is under widespread strain, has been one of KKR’s targets under its global mobility theme. Despite the current disruption, KKR is still favourable on the sector. “This pandemic is affecting assets classes where we think the medium and long-term trends are still positive,” including hotels and student housing, says d’Avanzo. “Right now we don’t see distressed opportunities but we are starting to see the beginnings of it.