Venerable Chicago real estate firm JMB Realty made an investment in 1989 that is remembered today for all the wrong reasons—it crashed and burned, leaving the firm and its investors out more than $424 million in equity.
As the US real estate market went south in the late 1980s, JMB began looking for deals in Europe—with a young Barry Sternlicht heading up the firm's effort. The firm—and 15 pension fund investors—eventually invested in Randsworth Trust, a London-based property company with more than 650,000 square feet of office space and 300,000 square feet of retail space in London's West End.
The plan was simple: purchase the property company, sell off a few large assets to pay down the debt and provide working capital. Unfortunately, the trust was purchased at the top of the market; as prices fell, the needed capital did not materialize and JMB had to ask investors for additional money to recapitalize the investment. Things never got much better and, by 1992, Citigroup put Randsworth into receivership, having cost the lender a reported $120 million.
In addition to being a black eye for one of the most prestigious real estate investment firms in the US, Randsworth had farreaching implications. Following that initial investment, US private investment firms began expanding into Europe to look for outsized returns as domestic markets tanked. There, they increasingly found high interest rates and stagnating economies.
Says one market participant: “If this deal had succeeded, I believe the pace of US investment offshore would have occurred earlier and been more robust. Because of the outcome and negative publicity [of the Randsworth deal], many US institutions were skeptical.”
But from every crisis come opportunities and JMB, though its business is much smaller today, became the breeding ground for a number of private equity real estate heavyweights, including Starwood Capital founder Sternlicht, former Blackstone heavy John Kukral and Benson-Elliot founder (and former Doughty Hanson real estate head) Marc Mogull.