The merger of Bentall Kennedy, the Toronto-based real estate investment management business of Canadian insurer Sun Life, with New York and London-headquartered private equity real estate firm GreenOak Real Estate, serves as a reminder of the importance of staying connected to former colleagues.
Discussions to combine the two businesses – into a $47 billion assets under management, 21-office operation offering a 700-strong investor base real estate strategies spanning the risk-return spectrum – began early last year over a dinner in the US. It was attended by GreenOak co-founder Sonny Kalsi and his former Morgan Stanley colleague Amy Price, today Bentall Kennedy’s US president and chief investment officer.
“They were having conversations about each other’s worlds,” explains Gary Whitelaw, a 20-year veteran of Bentall Kennedy and its chief executive, who is set to become CEO of Bentall GreenOak – the amalgam of the two brands once a deal valuing their combination at $940 million completes by this summer. “From that conversation, there were follow-up calls. Then we realized this would be quite interesting. It felt like two puzzle pieces coming together.”
From the Sun Life perspective, the transaction offered a response to those from its approximately 545-strong property investor Rolodex requesting higher returning strategies, in addition to the North American core vehicles Bentall Kennedy currently offers, as well as access to European and Asian real estate. “They asked the question: what are you able to do for us that is complementary with our investments with you in the core space?” he says.
Whitelaw is part of a wider effort by Bentall Kennedy’s immediate parent, Sun Life Investment Management, to grow an alternatives investment capability for its parent, the Sun Life Assurance Company of Canada, which stewards the Canadian insurer’s investments. That effort got going with the 2014 founding of SLIM, a $46 billion AUM operation currently reflecting an aggregation of three acquisitions: fixed-income managers Prime Advisors and Ryan Labs as well as Bentall Kennedy.
Growth by acquisition
There has been a little organic growth along the way, in “adjacent spaces” like real estate debt in North America, Whitelaw explains. “For example, we just completed our fourth and final closing of a high yield real estate credit fund in Canada,” he says. “But as we move further afield into intensely more competitive markets, understandably, we didn’t see ourselves saying to clients we’d like to learn them on your dime.” Growth by acquisition was, thus, deemed the appropriate avenue.
It will come at a price. Sun Life is buying into GreenOak at a relative peak in the property cycle when firms commanding significant AUM – GreenOak brings about $11 billion of assets to the table – and strong performance – the firm’s first two fully realized funds, US Fund I and Japan Fund I, were generating net internal rates of return of 32 percent and 33 percent, and net equity multiples of 1.7x and 1.6x, respectively, as of March 31, according to an investor document – will sell at a premium.
Indeed, at an approximately 12x multiple of estimated earnings in 2019, Sun Life is valuing GreenOak at the higher end of the spectrum for real estate managers. As that deal finalizes, so does another with similar characteristics: Palmer Capital is a considerably smaller, single country-focused private equity real estate firm with about $1 billion of assets, but is also selling to a Canadian buyer. Montreal-based Fiera Capital is acquiring an 80 percent stake in the London-based firm at a lower valuation of between 6x and 8x earnings. Peter Cuthbert, president of Fiera Properties, the investment manager’s property company, understands the comparison but reiterates the two deals’ differences, too. “I do think, at this point of the market, scale comes at a premium,” he says.
In any event, while Carrafiell and Kalsi, alongside other senior GreenOak management, will receive $102.5 million from their transaction, the deal sees them retain about 33 percent of Bentall GreenOak and for at least another seven years thanks to a put and call option. So, too, will Tetragon Financial Group: a Netherlands-listed investment manager that provided GreenOak with a working loan of $20 million and $100 million of co-investment capital plus an equity stake in TFG when the ex-Morgan Stanley bosses launched the business shortly after leaving the investment bank in 2010.
“Culture makes a great deal of difference. Its first and foremost, in fact. Product fit would be second”
In a sense, then, they, too, have bought into the conjoined business at a high multiple, albeit the valuation of Bentall GreenOak was based on a blend between GreenOak’s and a lower 10x multiple for the North American manager – that partly reflecting its core products having lower fees than GreenOak’s value-add offerings. Carrafiell sees plenty of upside to come from remaining invested and that is why he, Kalsi and the firm’s other senior managers are happy to see approximately 75 percent of their equity held as shares in the new firm tied up for effectively the same time as a typical real estate limited life fund. He says: “Sonny and I have built GreenOak over the past eight years along with our partners. We are not going anywhere. Even after the ‘put’ event, we will have significant skin in the game and our GreenOak name is on the door.”
For Tetragon’s part, the firm reported a $42.5 million recoup from the deal but likewise remains keen to stay invested. It will hold a nearly 13 percent stake in Bentall GreenOak when the deal concludes and, just as it backed every GreenOak fund so far, Tetragon has signaled it would also continue to back the enlarged operation. “We will continue to hold our key investment in Bentall GreenOak, will serve on its board of directors and will participate as an observer in investment committees for relevant funds. Furthermore, we expect to invest in new Bentall GreenOak funds,” confirms Stephen Prince, head of Tetragon Asset Management.
No competing strategies
Returning to the jigsaw analogy, Bentall GreenOak should encounter minimal reorganizational headaches upon closing thanks to the two firms’ having no competing strategies. Bentall Kennedy brings about $36 billion of assets across the main property types in the US and Canada, including about $18 billion of Sun Life debt and equity investments. GreenOak, meanwhile, has no exposure to North American core property or credit. On the other hand, its $11 billion comprises primarily of US, European and Asian value-add and opportunistic equity assets.
“Even after the ‘put’ event, we will have significant skin in the game and our GreenOak name is on the door”
Their respective investor bases have markedly different orientations, too; in fact, there are fewer than a dozen shared investors. Says Whitelaw: “In our world, many have been traditional core investors, whereas GreenOak’s investor base is primarily value-add. Where we have more LP overlap is among the Canadian clients, which have started moving more globally and into the value-add space having already established their core holdings. There we have some common clients.
“I think where you can end up with one plus one equals less than three, or perhaps even less than two, is where you find you have complicated redundancy or overlap conflicts with strategies.” Whitelaw adds that factor turned Sun Life away from exploring some other options which had significant US core businesses.
“It’s rare in a merger for there to be virtually no overlap,” comments Carrafiell. “This is all about bringing together two leading franchises which operate in completely different ends of the risk-return spectrum and regions and countries other than the US.”
The one area where both men agree there is significant overlap, however, is in their corporate cultures. Whitelaw stresses: “Culture makes a great deal of difference. Its first and foremost, in fact. Product fit would be second.”
Carrafiell says it took the best part of a year to get culturally comfortable. He also admits familiarity with former colleague Price was an important starting point. “We were not looking to sell,” he says. “Our focus was whether we could achieve three things: a strategic transaction that would significantly enhance GreenOak’s franchise and capabilities; a situation where we were not giving up control; and a partnership that would cause no dislocation of our team.”
When Bentall Kennedy approached, via Price, “the dialogue was very natural,” Carrafiell says. As a consequence of that, a former colleague will, soon, be a current colleague once again.
Management buys are the natural next step
Canadian-led M&A is the next step in the country’s institutions meeting its ambitions for the asset class
There is more than coincidence linking the latest entity-level real estate investments by Canadian organizations Sun Life and Fiera Capital, both of which were announced at the turn of the year.
Indeed, by Bentall Kennedy CEO Gary Whitelaw’s reckoning, Canadian institutional real estate portfolios, which emerged relatively unscathed following the global financial crisis a decade ago, are reaching natural growth constraints and that is prompting investors to seek greater overseas exposures. While the country’s largest investors, such as Canada Pension Plan Investment Board, or Public Sector Pension Investment Board, have been able to deploy large amounts of equity via joint ventures, clubs and other vehicles, particularly as their competitors licked their wounds in the immediate aftermath of the crisis, the country’s next tier of investors has had to rely on backing international firms’ indirect offerings.
“The Canadian reach has its limits organically,” says Whitelaw, noting this is why the country’s managers are now pursuing entity investments in an effort to bring Canadian money into international markets. “And so we needed to expand the business reach by acquisition.”
A similar ethos prevailed in Fiera’s purchase of an 80 percent stake in London-based private equity real estate firm Palmer Capital in a deal which valued the stake at £40 million ($50.61 million; €44 million), the first corporate acquisition of an intended international spree aimed at growing its real assets AUM from around $3 billion today to closer to $10 billion by 2022. Fiera Properties president Peter Cuthbert thinks Canadian capital will feel more comfortable with Canadian management in international markets: “Now, if a Canadian investor commits to one of Palmer’s funds, they’ll not be an outsider in the market. We would eliminate that. I think that is what we, Bentall, and others are trying to do – be present in the markets where we can have control and influence.”
“The proof of concept, though, is you need to be domestically present, with local teams that are loyal and directly accountable to you to be successful,” Cuthbert adds. “This is about driving performance and managing risks.”
The need for driving performance is high for Canadian real estate investors today given diminishing domestic returns. According to performance data provider MSCI, Canadian real estate returns have lagged global returns since December 2013 (see chart). It is of little wonder, subsequently, that Canadian outbound capital deployment has surged since then. Real estate transactions data provider Real Capital Analytics recorded just $52.3 billion of outbound real estate investing by Canadians in 2011, the year the domestic market produced its best performance in the last 10 years. Conversely, the country’s worst performing year of 2016 saw its investors deploy their highest amount of capital offshore. “I think Canadian investors have learned a lot about the benefits of investing across the board,” says Cuthbert.