Friday Letter Recall of duty

Apollo Global’s Joseph Azrack is set to return to CPI, however concerns over integrating the two platforms has proved a critical issue with LPs. 

After eight months of intense negotiations, Citigroup has finally selected a preferred bidder for its private equity real estate arm, Citi Property Investors – Apollo Global Management.

The decision brings to a close the sale of one of the largest private real estate investors globally, just six years after it was first founded, and a sale that generated interest from a large number of potential bidders, not least Macquarie Group, ING REIM and Northwood Investors.

At first glance, the decision should have been a simple one. Apollo’s real estate team is led by Joseph Azrack, the man who helped create CPI in 2004 and led the firm as president and chief executive officer until his departure in the summer of 2008.

By returning for a second tour of duty, investors in CPI’s three funds are getting a man and a platform that will hit the ground running. Apollo is also actively building its real estate team, having grown to a roughly 28-person strong team in little more than 18 months.

However, as the management buyout of Lehman Brothers’ real estate private equity platform proved all too clearly in 2009, selling what is essentially a people business is never an easy task. Citigroup had hoped to make an announcement at the end of January, according to PERE sources, but was forced to delay that when LPs raised issues over staff integration.

Apollo was finally chosen after garnering enough support from the LPs from each of CPI’s funds as well as from Citi itself, which is both an LP in the vehicles as well as GP. That support though was not unanimous, according to sources.

As LPs face the challenges posed by the real estate recession, keeping GP teams together has proved a crucial issue. Only time will tell how successfully Apollo integrates the existing CPI team into its fold, especially current president and chief executive officer Roger Orf. With Orf and Azrack having once worked together, Apollo stands a better chance than most of winning that battle. For LPs in CPI’s funds though, it has proved a critical concern.

When limited partners put their money into Citi Property Investors’ funds, none of them expected the parent bank to undergo a change of heart several years later and abandon the project entirely.

Forced into replacing their GP, limited partners have every right to be angry at the turn of events. However, a future path has now been agreed on and LPs can take heart that the new owner is one intent on growing the platform, rather than one that was winding it down.

For Azrack, that happens to mean a return to the fold.