Going solo

Opportunity fund managers are increasingly spinning out of larger institutions to launch their own private equity real estate firms. Will their solo acts strike gold? By Paul Fruchbom

The history of rock and roll is, in some sense, a history of tragedy and untimely death: drug overdoses, plane crashes and, perhaps most heartbreaking of all, solo recording efforts.

There are always exceptions, of course, musicians whose individual careers overshadowed their previous collaborative work, at least in terms of longevity: Sting and Peter Gabriel to name just a few. But for every Michael Jackson, there are many more David Lee Roths.

As much as private equity real estate professionals would wish otherwise, there are few parallels between the life of a rock and roll singer and that of an opportunity fund manager. Yet at least in one respect—the propensity of well-known superstars to launch a solo career—similarities abound.

Though the opportunity fund business has always seen its fair share of spin-outs, that trend has accelerated over the past several years due to a growing demand for high-return strategies and a relatively limited number of skilled managers. In the past six months, the drumbeats have grown even louder as a number of highly respected GPs at the world's largest private equity real estate firms have walked out the door to form their own investment vehicles. A sampling of the most recent departures includes: Russel Bernard, the former head of Oaktree Capital Management's real estate group, who started Westport Capital Partners earlier this year; Jeff Citrin, the former head of Blackacre Capital, whose plans remain unclear; and John Kukral, the recently departed co-founder of Blackstone Real Estate Advisors, who many expect to hit the fundraising trail soon.

“John is not out there now,” notes one pension fund consultant. “But I wouldn't be surprised if he went out in the future.”

Though the starting point of the current trend can be debated, it most likely began almost three years ago when Dan Neidach, the former head of Goldman Sachs' Whitehall Funds, left the white-shoe investment bank to form Dune Capital, a New York-based hedge fund, along with Steven Mnuchin, another Goldman alum.

“Dan might have been the most senior person to have left a larger platform,” says the consultant.

For Neidach and others, the rationale for starting an independent entity is straightforward—greater autonomy and economics for the GP. The rationale for institutional investors to back these managers, however, regardless of their track record, is less clear cut.

As the pension fund consultant points out, there are specific risks involved in these situations. For one, LPs are very interested in the specific reason for the manager's departure as they want to ensure that the individual handled himself or herself with integrity. For another, questions arise as to the new firm's strategy: Will someone who excelled at completing $1 billion deals be able to successfully execute a business plan on a smaller scale? And there's always the issue of culture: whether or not a professional who thrived in a large institution can handle the daily rigors of running a smaller, entrepreneurial firm.

Perhaps the biggest risk involves the personality and disposition of the individual manager. Someone who has already made a significant amount of money may not be as hungry as a new manager with something to prove. Even if the battle-tested pro has a reputation and a legacy to protect, how will they react if their investments are underwater and their newly recruited talent is heading for the doors?

“All this goes to underwriting the individual and how he or she has handled themselves historically,” says the pension fund consultant.

Nevertheless, the buoyant state of the fundraising market means that the current trend will most likely persist. And even if there is a downturn, some believe that successful GPs will still want to form their own firms—and LPs will still want to invest with them.

“I think you should continue to expect to see managers spinout,” says the advisor. “Even if there is a huge correction in the market that could create baggage for some managers, allowing others to go out there and raise capital without that baggage.”

Despite the advice of Neil Young, rock stars tend to fade away, especially if they strike out on their own. It's too early to tell whether the results will be different in the private equity real estate industry, but businessmen— perhaps because many of them don't indulge in cocaine-fueled binges at the Chateau Marmont—tend to have more staying power than recording artists.

If these enterprising managers can live up to their past glory, well then that would be music to every investor's ears.

LaSalle solicits for medical office fund
LaSalle Investment Management has reportedly begun contacting investors for a second high-yield fund targeting medical office properties. According to reports, LaSalle Medical Office Fund II has a $350 million (€285 million) equity goal and will seek a return of up to 12 percent by acquiring or developing medical office buildings in established healthcare markets throughout the US. Alaska Public Employees and Teachers reportedly plan to invest $30 million in the fund. Medical offices are often considered a good investment because they typically have steady occupancy and have a higher lease-renewal rate than other offices. LaSalle's new vehicle will be the largest fund specifically targeting medical office purchases to date.

CalSTRS banks on real estate, Cherokee
The California State Teachers' Retirement System will invest $1.3 billion (€1.1 billion) in five real estate vehicles. The pension fund has committed an additional $290 million to a joint venture with Waterton Associates Residential Property Fund VII and Fund VIII; $400 million to Cherokee Investment Partners IV, a value-added closed-end fund that restores environmentally damaged property; $400 million to LNR Commercial Property Investment Fund, which will target commercial and multifamily assets; and $100 million to Richard Ellis. CalSTRS has also committed up to $95 million to a consortium led by Morgan Stanley's Real Estate Fund V International, which will acquire the retail development unit of Dutch real estate company AM NV.

McMillan closes real estate investment fund
McMillan Capital, a San Diego-based real estate investment and management company, has held an initial closing for its sixth private equity real estate vehicle on $14.4 million (€11.7 million). McMillan says the fund will have a capital investment target of $50 million to $100 million, with a projected internal rate of return of 16 to 20 percent. Fund 6 investments include land development, entitlement and home building projects in Central and Southern California. The first portfolio investment was in Terracotta, a master-planned community in the Corky McMillan Companies' Lomas Verdes in Chula Vista, California. McMillan, headquartered in San Diego, was founded by real estate and development veteran Corky McMillan.

Onex partners with Camden Property Trust
Onex Real Estate, the property arm of publicly traded Toronto-based private equity firm Onex, has paired up with Camden Property Trust on a new development plan to build $1.4 billion (€1.1 billion) of new multi-family developments over the next few years. The team is starting with projects in California and Texas; the first project will be a $45 million development in Houston, which will break ground in 2007. In the long-term, 70 percent of the developments will be in California, Florida, or the Washington, DC metro area.