Going out on top

Could a string of recent high-profile departures signal the height of the private equity real estate industry?

On September 27, 1930, at the Merion Cricket Club in Ardmore, Pennsylvania, Robert Tyre Jones Jr. made sports history. By winning the US Amateur championship, golfer Bobby Jones became the first player to capture all four major golf tournaments in a single year, a feat that came to be known as the Grand Slam. He would also be the last and Jones, only 28 years old, would never play competitive golf again.

Although “going out on top” has become a tired cliché among newspaper reporters and TV sports anchors, few if any modern athletes have truly personified the phrase, particularly at such a young age. Bjorn Borg, who retired at 26 after winning eleven Grand Slam tennis titles, came close— until he made an ill-fated comeback in the 1990s using a wooden racket. Prizefighter Rocky Marciano was an undefeated 42-0 when he left the ring at the age of 32, but it was back pain, not personal choice, that forced him out. And let's not forget Michael Jordan, whose first retirement at the age of 30 was followed by two years in baseball's minor leagues, a return to the NBA for three more titles, a second retirement, a bizarre and thankfully brief return to the NBA, an inordinate amount of underwear commercials and, at long last, his third and final goodbye.

Thus it was the specific legacy of Bobby Jones, who died 24 years ago this month, which came to mind recently when some surprising news emerged from the private equity real estate industry. In relatively short order, the founders of two of the industry's biggest and most well known firms, in the midst of one of the greatest bull runs in the history of the real estate market, simply decided to leave.

The resignations of John Kukral of Blackstone Real Estate Advisors and Jeff Citrin of BlackacreCapital Management were notable not just for the stature of the individuals and firms involved, but also for the rather enigmatic quiet that surrounded their departures.

Unlike previous high-profile exits in the industry, there were no announcements of an independent private equity fund being started this time around. No discussions about a new hedge fund in the works. And no mention of tension between the two principals and their respective bosses. In fact, one report suggested that Citrin, who, like Kukral, will be departing at year end, would take some time off before deciding on his next career move.

All of which sparked a gut reaction—could either one of these individuals be leaving the industry, a Bobby Jones-like exit into history?

If so, the odds are stacked against them. The list of professional athletes who have gone out on top—and stayed out—is extraordinarily short. And if one were actually to compile a similar list of businessmen, it would be even shorter (although Mark Cuban, who earned approximately $6 billion when he sold Broadcast.com to Yahoo in 1999, springs to mind).

If so, the odds are stacked against them. The list of professional athletes who have gone out on top—and stayed out—is extraordinarily short. And if one were actually to compile a similar list of businessmen, it would be even shorter (although Mark Cuban, who earned approximately $6 billion when he sold Broadcast.com to Yahoo in 1999, springs to mind).

The same drive and ambition that allows people to reach the top of their profession are the very same things that keep them there after they've earned more money or success than they ever imagined. (I'm reminded of Fortune reporter Andy Serwer's conversation with a Wall Street trader. “If I ever made $100 million,” Serwer said, “I'd call it quits.” The trader's cold response: “That is why you'll never make $100 million.”)

Alas, the more plausible explanation is that Kukral and Citrin will eventually follow in the footsteps of so many others and start their own independent firms. Not going out on top, as it were, but, rather, starting out on top.

Blackstone, or one, has already seen a number of senior officials depart recently, including Tom Saylak, who founded the firm's real estate arm along with Kukral, and private equity head Mark Gallogly. Even storied buyout firm KKR has seen some of its best and brightest seek greener pastures—partners Scott Stuart and Ned Gilhuly will soon leave to start their own hedge fund. The list could go on and on.

This is, of course, a natural progression. For while athletes often falter in the second half of their careers, the same cannot be said for many financial entrepreneurs—the mind, after all, lasts much longer than the body. And, from a timing perspective, has there ever been a better—or perhaps the word is easier— time to raise a leveraged buyout, private equity real estate or hedge fund?

It might be a little romantic to hope that someone would pull a grand farewell in the manner of Bobby Jones, but, of course, the private equity industry would not be where it is today if its torchbearers had done so. Unfortunately, that means the only people we hear much about are those who go out on the bottom— Michael Milken or Ted Forstmann, for example.

Until disease crippled him, Jones, like many retirees, spent his golden years playing golf. But in his downtime, he also managed to build Augusta National, one of the most revered golf clubs in the country. It is perhaps his greatest legacy.

Unfortunately, for newly retired private equity real estate professionals, the course is not for sale.


E&Y survey shows $120bn of overhang
A new report from consulting firm Ernst & Young, which surveyed 179 opportunity and value-added funds, has found that approximately $18 billion (€15.4 billion) of capital is expected to be raised in 2005 and that an additional $17.5 billion is currently available from existing funds. When this equity is leveraged at approximately 70 percent, “this represents $118 billion of total capital to invest in 2005 and beyond.” The 2005 Real Estate Private Equity Market Outlook further notes that while almost 90 percent of fund managers surveyed are looking to invest in the US, 40 percent of respondents are looking to other markets; that figure climbs to more than 75 percent when the sample size is limited to fund sponsors with more than $1 billion. The report also points out the following: “Interestingly, our respondents indicate that their target return expectations average almost 21 percent on a gross basis…which is fairly consistent with our prior surveys.”

Rockpoint closes $1.7bn fund
San Francisco- and Boston-based private equity real estate firm Rockpoint Group has closed its second opportunity fund on approximately $1.7 billion (€1.5 billion). The firm's debut fund, Rockpoint Real Estate Fund I, closed in 2004 on $1 billion. Rockpoint recently completed two deals: the acquisition of the Villas at Parkmerced, a 3,221-unit residential complex in San Francisco, and the purchase of 522 Fifth Avenue, a 23-story office New York City office building owned by JP Morgan Chase. Rockpoint was founded in 2003 by five managing members of private equity real estate firm Westbrook Partners, including cofounder Bill Walton.

Starwood creates development arm
Greenwich, Connecticut-based private equity real estate firm Starwood Capital has launched a division, Starwood Development, to oversee the company's development activities and related resort and condo/hotel investments. Leading the group will be president Gary Raymond, formerly president and chief executive officer of resort developer Intrawest Placemaking, who will join Starwood's San Francisco office at the end of this year. At Intrawest, Raymond led the development of a number of ski communities including those at Whistler, Stratton and Snowmass, an experience that should prove useful at Starwood. In October, the private equity firm acquired a majority interest in California ski destination Mammoth Mountain in a transaction that valued the resort at $365 million (€306 million).

Och-Ziff to form JV with REIT
New York-based hedge fund Och-Ziff Capital has signed a letter of intent with American Financial Realty Trust, a publicly traded REIT, to form an opportunistic joint venture that will acquire American Financial's non-core assets, defined as assets not occupied by financial tenants or those without a strong possibility of being leased. Under the terms of the proposed arrangement, Och-Ziff will fund up to 85 percent of the JV, which could acquire up to $1 billion (€850 million) of assets. Och-Ziff, manager of approximately $10 billion in assets, launched a real estate arm in 2004, led by former Blackstone principal Steve Galiotos.

McMillin closes $50m opportunity fund
San Diego-based real estate investment company McMillin Capital has held a final close on its third private equity real estate fund, raising a total of $48 million (€41 million). McMillin CapitalFund III will invest in a variety of residential, retail and land development projects primarily in California and the Western US. The fund has already invested in six projects in California. Both of the company's first two funds, each less than $7 million, were used to finance individual projects.