Friday Letter Aboard the good ship Guggenheim

Guggenheim Partners is sailing into unchartered waters with its possible takeover of Deutsche Bank’s asset management businesses, which including RREEF.

The jokes already are circulating ahead of the international property show, MIPIM, in Cannes, France next week: Will the RREEF Real Estate yacht be renamed ‘The Guggenheim’?

Such teasing follow news this week that RREEF’s owner, Deutsche Bank, has entered into exclusive negotiations with New York- and Chicago-headquartered Guggenheim Partners to sell much of its asset management businesses, which includes RREEF.

The initial reaction to Guggenheim potentially buying the units from Deutsche Bank was one of surprise and a bit of head-scratching from some within the property industry. After all, this private firm wasn’t tipped by the press as being an interested party. So, how did it get a place at the table against financial services heavyweights such as JPMorgan Chase, Wells Fargo and State Street?

Though representatives from Guggenheim, RREEF and Deutsche Bank are all understandably mum about details of these negotiations, it should be noted that, with somewhere in the vicinity of $125 billion of total assets under management (AUM), Guggenheim Partners is far from an underdog. Just because it doesn’t regularly make the headlines with sexy deals doesn’t mean it’s not a significant player in the asset management and indeed the alternatives space.

Still, assuming the deal goes through and Guggenheim retains all the businesses for sale, it certainly would be a transformational event for this relatively young firm. In terms of real estate, it would wind up being one of the largest investment managers in the world overnight. Indeed, the wider corporate transfer would see Guggenheim quintupling in size, surpassing $660 billion AUM by adding Deutsche Bank Asset Management businesses with nearly $539 billion of assets.

A number of folks in real estate see a shrewd move by a savvy group unfolding here, at least as far as the property investment business goes. The general tenet of their argument is that the RREEF platform is a good brand with battle scars, implying that now could be the perfect time to buy it at a reasonable price.

Corporately, Guggenheim has been in expansion mode across the board. In February 2010, it agreed to buy Security Benefit, whose holdings included an asset management business with $22 billion. In July 2009, it bought Claymore Group of Lisle, Illinois, which oversaw $12.9 billion in exchange-traded funds and other assets at the time of the deal. In January, Guggenheim sold its interest in Claymore Canada to New York-based BlackRock, the world's largest asset manager with $3.5 trillion. And if college campuses are anything to go by, it is still being aggressive in staffing up, with recruitment drives in full swing.

Of most interest to PERE readers, however, is what Guggenheim currently has to offer in the real estate arena.

RREEF’s real estate business is large. It employs some 600 professionals and has €41.8 billion in assets as of 31 March 2011. Within the portfolio are core, value-added, securities and opportunistic businesses, though most assets are in core real estate and securities. Some €22 billion of its property under management is located in the Americas, while €16.6 billon is in Europe and €3.4 billion is in the Asia-Pacific region.

Much less is known about Guggenheim’s heft in the asset class. It doesn’t publicise its real estate assets under management and didn’t wish to divulge information in the wake of this week’s announcement.

What we do know is that Guggenheim Real Estate is a serious platform, although it recently shrunk when Ed Shugrue took his Guggenheim Structured Real Estate Advisors team to spin out on its own late last year. Guggenheim Real Estate, based out of Boston, was established in 2001 and invests across a wide spectrum of the real estate market, including direct real estate, REIT securities, private funds and commercial mortgage-backed securities. It also has an active fund of funds division, the Guggenheim Real Estate Plus Fund based out of New York.

While the jury is out on how much of a culture clash there may be between the two real estate entities, it seems clear that Guggenheim, if it keeps RREEF Real Estate, suddenly will be thrust into the front row of real estate investment managers. And it no longer could be accused of not doing sexy deals.