Building to suit

As LPs shy away from commingled funds, an increasing number of GPs are tailoring their investment vehicles to suit investor needs. For Guy Jaquier and AMB Capital Partners, that’s always been par for the course.

Even by the roughest of calculations, it’s clear to see institutional investors are taking back control of their real estate dealings. In 2010 alone, little more than a dozen of the world’s largest public pension plans and sovereign wealth funds ploughed more than $10 billion of equity into direct and joint venture deals, according to PERE estimates. That compares with closed-ended fund managers corralling just $21.5 billion of equity for their real estate vehicles over the same period.

It’s a situation that is prompting GPs to change the shape of the vehicles they offer investors. Separate accounts, joint ventures, club deals, club funds, single and/or multi-investor funds, hybrid commingled/co-investment funds, discretion in a box and even discretion nowhere near the box – never before has the private equity real estate industry seen such a profusion of products.

Guy Jaquier, president of AMB Capital Partners, the private funds arm of industrial REIT and investment manager AMB Property, the phenomenon is far from new. He argues that, like any decent build-to-suit industrial strategy, firms should always be tailoring their services to customers’ changing needs and desires. Investment managers are no different.

Guy Jaquier

Just look at capital flows targeting the US over the past year. Roughly 12 months ago, European – notably German and UK – capital was eagerly eyeing the US for core assets on the cheap, thanks to a weakened dollar. Today, those European investors are being overtaken by Canadian, South Korean and Chinese investors. “You have to be flexible in what type of product you offer because it’s about accommodating the various goals and objectives of the different investors,” says Jaquier.

AMB is certainly flexible when it comes to fund structures. Founded in 1983 by Douglas Abbey, Hamid Moghadam and Robert Burke (the A, the M and the B), the firm today manages 158.4 million square feet of core and value-added industrial assets through its listed REIT structure and nine private co-investment ventures, the latter of which hold more than 56 percent of AMB’s owned and managed operating portfolio.

You have to be flexible in what type of product you offer because it’s about accommodating the various goals and objectives of the different investors.

Guy Jaquier, president of AMB Capital Partners

Those co-investment ventures, though, are not your run-of-the-mill JVs. Within the nine vehicles are two open-ended funds, two private equity real estate commingled funds and four separate account JVs, as well as one of the first real estate vehicles to raise capital from Mexico’s Afores system of private pension funds.

“One of the challenges you always find is that in good times capital comes into a market, but then something happens and it goes out again, often back home,” says Jaquier. “It’s about structuring around different types of capital and capital flows.”

In its latest fund, AMB Mexico Fondo Logistico, the firm adopted a form of trust fund security created by the Mexican government to help finance infrastructure and real estate projects and to channel capital from domestic institutional investors into private partnerships. The Certificados de Capital de Desarrollo, or CKDs as they are known, are listed on Mexico’s stock exchange, although the units are not expected to be traded like traditional equities.

Due to expire in July 2020, the Mexico Fondo raised $3.3 billion pesos (€192.5 million; $260 million) in August from 21 Mexican pension funds, among others. With leverage, the firm expects to deploy around $700 million of capital, acquiring industrial assets in Mexico City, Guadalajara and Monterrey – the country’s three biggest cities – and in other cities where AMB is already present, such as Tijuana, Reynosa, Toluca and Querétaro.

Alison Hill

Alison Hill, managing director of global fund management, says the idea for the fund was raised by AMB’s local team in Mexico in July 2009, when the regulations were first introduced.

“This was a locally driven effort to get local capital into local projects,” she says. As the first real estate CKD to list on the Mexican stock exchange, it is still early days for AMB Mexico Fondo Logistico, but AMB is eyeing a follow-on fund once the debut vehicle is fully invested. “As Guy says, sometimes capital is coming, sometimes it’s going. We want to ensure our capital base is diversified as a result.”

Structural changes

For Jaquier, the supposed proliferation of investment structures being witnessed today is not so much a response to GPs needing to expand their investor base, rather it is a change of focus among investors. “There is much more focus on risk mitigation today, on all levels,” he says. “People realised they had risks they didn’t even know existed for them.”

As a result, LPs are drilling down into details like never before – and asking for greater control when they do deploy capital. “This is not just a box on due diligence, it’s a real thing,” Jaquier says. “LPs want to get into financial statements a lot more, they want to know your positions, they want to understand counterparty risk and they want to know who the other LPs are. That was something that was never really focused on five years ago when an investor went into a fund.”

[For LP's] it’s a culture of risk aversion and of not making a mistake, and there’s little reward for beating the benchmark.

Guy Jaquier

Indeed, investors want to know, should the fund ever melt down, who else is going to be sitting in the room with them trying to decide what to do. “They are asking whether those other investors are really like-minded or not,” Jaquier stresses.

Of course, these are sentiments you frequently hear spoken by private equity real estate fund sponsors. But, unlike many of his peers, Jaquier also has spent time on the other side of the investment fence as a senior investment officer at the $222.9 billion California Public Employees’ Retirement System. In charge of a $12 billion real estate portfolio between 1998 and 2000, Jaquier has more than a small appreciation of where LPs are coming from.

“The industry wants the investor to focus on their deal because it’s a really good investment opportunity,” Jaquier says. “An investor’s priority is reporting to the investment committee board about the plan’s real estate exposures and risk profiles. It’s a culture of risk aversion and of not making a mistake, and there’s little reward for beating the benchmark.”

Jim Green

And for those pensions that beat the benchmark by too great a margin? Even that could result in future penalties for investment officials who might be deemed to have taken too much risk, according to Jim Green, AMB’s global client services managing director. “LPs have a very different mandate than a GP, and the continuous debate about the end of the commingled fund is over-simplified. Investors are saying they want more governance and less risk. It doesn’t mean the end of the fund model, it just means the industry needs a different way of structuring it.”

It is precisely this “discretion in a box”, as it has been dubbed, that AMB says it offers investors through its various co-investment ventures. “It’s a pure mix of capital structures, but one thing is for sure – it will only be industrial,” says Green.

Indeed, AMB may have started out life as an office, grocery-anchored retail and industrial investor, but by 1999 the San Francisco-based firm specialised in just one sector: industrial, specifically high-traffic distribution facilities. “We think it’s better to focus on one business and do it really well,” Jaquier adds.

Risk equation

In having such a narrow focus, however, it can be argued that AMB is itself denying investors the diversification – and lowering of risk – they are searching for, not least when the sector being targeted is still suffering negative net operating income growth and historically high vacancy levels. Indeed, by AMB’s own figures, the firm’s average occupancy rate as of 30 September was 91.7 percent and NOI growth on a cash basis and rent change on renewals and rollovers for the trailing four quarters was negative 11.8 percent.

It was like a sucking sound of inventory coming out of the system.

Guy Jaquier

The crisis undoubtedly hit the global industrial sector hard, as retailers ran down their inventory to the barest of minimums. “It was like a sucking sound of inventory coming out of the system,” Jaquier says. Yet, consumers didn’t retreat completely from the scene in 2009 and are still buying – albeit with more caution – today. As a result, retailers are restocking their supplies, just not with the confidence and conviction of previous years. “It’s more replenishment than restocking in some markets,” he adds.

For industrial real estate investors like AMB, that focus on refilling, as opposed to bulking up on supplies, has increased demand for expedited freight and their corresponding industrial and logistics facilities. “There were two real trends to emerge that affected the industrial sector globally after the crisis,” Jaquier says. “One was the use of slow steaming, where your goods would sit on a ship coming from China with a month’s lead time, and the other was much greater use of expedited freight.”

By focusing on prime assets located near gateway cities, airports, seaports and ground transport centres, AMB is in essence betting on the trend towards lower inventory levels and greater use of expedited supply chains, as opposed to the long-term storage of goods. “Out of the whole supply chain cost, real estate rental rates are usually about eight percent of the total supply chain  cost structure,” says Jaquier, “but it gives us a lot of leverage in that equation. If we have the real estate our customer needs that can unlock or reduce their other costs, then they are less sensitive to what the rent is because you are giving them additional value elsewhere.”

Future lessons

In trying to unlock this supply chain riddle, AMB has over the past eight years turned increasingly to emerging markets as its customers – among them DHL, the US government, Japan’s Sagawa Express and Nippon Express and FedEx – follow global trade flows. Roughly two-thirds of the firm’s development pipeline, often build-to-suit facilities, is now outside AMB’s largest market, the US.

In 2007, we were starting to build up teams and platforms in Central and Eastern Europe as well as India, but the opportunities really weren’t present in those markets. We ultimately decided to go deeper in China, Brazil and Western Europe.

Alison Hill

However, Hill admits 2007 predictions that AMB would substantially increase its non-US operating portfolio by the end of 2010 were dented by the credit crisis. “It put a hole in that plan,” she says, adding that the firm’s operating, cash-flowing assets outside the US currently stand at 30 percent. “In 2007, we were starting to build up teams and platforms in Central and Eastern Europe as well as India, but the opportunities really weren’t present in those markets. We ultimately decided to go deeper in China, Brazil and Western Europe.”

Post-crisis, Hill says the focus for AMB will be about “growing deeper where we are, rather than continuing to expand”. Challenged on whether this was one of the main lessons taken from the boom years, when rapid expansion by rival industrial developer-cum-fund manager ProLogis saddled the firm with high levels of debt and forced a management restructuring and massive asset sales, Jaquier, Hill and Green all decline to comment on their Denver-based competitor.

Jaquier, though, does add that AMB in 2011 will have less risk than the AMB of 2008. “Prior to the last cycle, we did have more land, more development and more leverage than we do today. It wasn’t so much that when everything hit the fan we faced the financial distress that could really disrupt our business, but it’s not unfair to say we got nervous, just like everybody else in real estate.”

Now that the excitement is over, Jaquier says real estate executives can ask the $64,000 question: “Where do we want to be if it happens again?” For Jaquier and AMB, it will be mirroring much of what institutional investors are calling for: less risk.

Tale of two cities

AMB’s Guy Jaquier spent two years working at CalPERS in a move intended to give something back to society. The experience provided him with access to some of the greatest minds in the business

Many real estate fund managers scratch their heads in wonder at the actions of their limited partners.

Schooled in a world where time is money, deal professionals rarely understand the motivations of their equity partners. Two years at one of the world’s largest public pension schemes, however, has left the president of AMB Capital Partners, Guy Jaquier, with more than a small appreciation of what makes LPs tick.
In 1998, after 15 years at real estate investment firm Equitable Real Estate – which had been acquired the prior year by Australian property firm Lend Lease – and reaching the age of 40, Jaquier was looking for a way to do his share of “public service” and decided to take a job as senior investment official at the $222.9 billion California Public Employees’ Retirement System, in charge of a $12 billion real estate portfolio. “It was a good time in my life for me to do something where my experience might actually be helpful,” he says.

It may have been for only two years, but Jaquier says living in the institutional investment world for even a short amount of time was a unique experience. “You have access to the best and the brightest in the world,” he says, challenging the notion that a majority of LPs are unsophisticated investors that merely follow the herd.

During this time, Jaquier met with some of the world’s leading fund managers. When one household name was speaking to him, another team of top quartile managers were lining up outside.

“That’s an amazing part of that job and why some of these investment officials, if they are listening to those sessions, can get a post doctorate degree in real estate really fast,” Jaquier says. “They don’t get paid much, and certainly not enough for what they do, but the intellectual stimulation is unprecedented.”