FRIDAY LETTER: Private to public

At PERE LA, reflections of a private equity real estate pioneer showed how long a way the industry has come, and suggested that firms breaking out of the closed-ended fund cycle may stay more relevant as the industry evolves.

As Thomas J. Barrack, Jr. regaled a rapt audience at PERE’s Global Investor Forum in Los Angeles this week with tales about himself, it became clear his stories weren’t just about his own journey through private equity real estate. Rather, they reflected the history of the industry itself, as well as its evolution since the days when Barrack and others first began.

According to the man himself, Barrack’s career in real estate occurred via a series of “happenstances”. He told delegates how an unlikely start at a law firm and then a posting overseas put him on a long and winding road, which eventually led to him big-time real estate investing.

He hadn’t followed a master plan, just like the first-generation opportunity funds that began as “vulture funds” hadn’t been based on any grand design, but emerged with an imperfect fund structure borrowed from private equity because the pioneers of the day didn’t know how else to build investment vehicles to buy distressed assets. Barrack’s own firm, Colony Capital, set out in 1991, and for many years thrived as a manager of closed-end limited partnerships.

Fast forward to 2015, and Colony has just reinvented itself as a public company. As Barrack would have it, muddling along with a less-than-perfect fund structure and an entrenched approach to doing things hadn’t seemed the way forward. He told the conference that the edge in business was to build long-lasting relationships, and went on to explain that for Colony, the time had come to evolve in order to achieve better alignment with its investors in a world where making profitable real estate investment has become more difficult than it once was.

Today, Colony’s mission is to drive share price appreciation and the provision of different products in specific business silos. The game is not to get rich quick, but rather to deliver long-term gains for investors, and to run the firm based on five-year business plans and quarterly reporting to the market. Barrack himself is “all-in”, because Colony has a 23 percent stake in the new public entity, with management subject to a five-year lock-in.

This is a vision of the future that the industry should take note of. Barack’s message to the LA crowd was clear: focus on long-term value creation rather than operating within the narrower investment cycle of a closed-end fund, and remain wary of leverage and risk, and real estate can be a very forgiving place to be – an asset class where investors can do well whatever the market environment.

The PERE Global Investor Forum was straplined “Get Ready for the Next Big Thing”. As Barrack would have it, Capital has done this already and is well prepared for the challenges ahead. It will be interesting to see which other managers will go the same way.