Three years from now, Aldo Mazzocco expects Generali Real Estate to look very different than it does today.

Generali Real Estate, the real estate asset management arm of Italian insurer Generali Group, manages €30 billion of assets as of year-end 2018, of which €2 billion was on behalf of third-party investors – about 6 percent. But that percentage is expected to rise considerably with the rollout of nine property funds this year, eight of which will have a pan-European focus, while the ninth will be a fund of funds due to be invested in Asian real estate funds. The entire range of funds will be open to both third-party and internal clients alike.

“We are transforming the business model, from one where nearly all of the capital for property was invested for the group, to one with a growing percentage invested for third parties,” Mazzocco, chief executive of Generali Real Estate, tells PERE.

Mazzocco: overseeing the launch of nine real estate funds

Generali, which has been investing in private real estate since its inception in 1831, is one of the world’s largest institutional investors in the asset class, ranking 15th in PERE’s Global Investor 50 ranking last year. The establishment of the funds platform is part of a larger shift at Generali Group, announced in May 2017, toward a greater emphasis on third-party investment management. For Generali Real Estate, which has 436 employees across nine offices in Europe, this will involve being organized into three divisions: fund management; asset management and property management.

“Our targets are ambitious, to grow significantly in the next three years,” adds Mazzocco, who is aiming to increase Generali’s total real estate AUM by approximately 25 percent and, of that total, third-party capital to reach 10-15 percent over that period.

The funds, which will be a mix of open-ended and closed-ended structures, will be dedicated to particular property types, including office, high street retail, shopping centers, logistics, residential and debt, and have specific risk profiles encompassing core, core-plus and value-add. The vehicles will be seeded with new and existing property investments from Generali Group’s balance sheet.

In addition to funds, Generali will seek to form joint ventures with large institutional investors where it will act as the operating partner. To date, the insurer has formed seven such JVs with third-party clients, including a €400 million European co-investment partnership with Poste Vita, announced in January, and a Paris office and retail JV with Norges Bank Investment Management, announced in July 2012.

6%

Percentage of Generali’s overall real estate AUM that is third-party

15%

Targeted percentage of overall real estate AUM that will be third-party in three years

“Our funds start with very large investments by the Generali Group, covering about 50 percent of the target size,” says Mazzocco, referring to the more than 20 local insurance companies that Generali Real Estate works with. “Now each chief investment officer can choose the mix of property types and risk-return; some countries want higher risk and higher returns, others prefer less return but more safety. Before, they were all buyers of assets the same way. This is, by the way, fantastic training for our sales force because the main and first investors are our own local companies: our product and sales teams test the fund’s attractiveness internally and sell it to outside investors in parallel.”

Targeted investors would include other mid-size insurers and other groups with a conservative risk-return profile – similar Generali’s – such as pension funds, he says.

For deal sourcing and asset management of certain funds, Generali will also form real estate “boutiques,” or joint ventures with operating partners. The first such boutique, Axis Retail Partners, focusing on shopping center investments, was announced in March and will advise Generali on the Generali Shopping Centre Fund, which is expected to be launched during the second quarter. The insurer will be making an initial €500 million commitment to the core fund, which will be targeted at large, high-quality shopping centers across continental Europe, with an annual target total return of 7 percent.

Meanwhile, Generali will hold a controlling 51 percent stake in the JV, while the remaining interests will be held by Florencio Beccar, who will act as chief executive of Axis Retail Partners, and Toby Smith, who will serve as chief investment officer. Beccar and Smith previously were fund manager and portfolio manager, respectively, of CBRE Global Investors’ CBRE European Shopping Centre Funds.

Change drivers

Generali is one of the latest insurance companies to ramp up third-party management in private real estate. Allianz Real Estate, the property business of the world’s biggest insurance company, Allianz, is also seeking to raise and invest external capital in real estate. The Munich-based insurer launched a property debt fund in July 2018 and since the start of the year, began preparing to open the fund to third parties. The first commitments from external partners are expected during the coming months. In the meantime, the Allianz companies have already contributed over €1 billion to the Luxembourg-based fund vehicle.

Another Munich-based insurer, Munich Re, is likewise gearing up via its investment management arm, MEAG MUNICH ERGO Kapitalanlagegesellschaft. “MEAG’s goal is to expand third party business,” said board member Wolfgang Wente. “New products for insurance companies and pension plans are in preparation.”

At the heart of this transition is the need for many insurance companies to generate more income. The bulk of products offered by insurers have been warrantied products, or insurance policies that were sold to clients. While warrantied products were profitable for insurance companies when interest rates were reasonably high, in a prolonged low interest rate environment, insurers might not be able to protect investors’ capital and make a reasonable profit, explains Laurent Lavergne, head of fund management at AXA Investment Managers – Real Assets, part of the asset management arm of AXA Group. The Paris-based investment manager has been investing third-party capital for 30 years, with more than 200 third-party institutional clients as of December 2018.

Lavergne: a need for more income has been one driver into the third-party space

Real estate investments, meanwhile, have been part of an insurer’s warrantied capital, or general account. “If you want to protect the existing portfolio in real estate, you might be a little concerned and want to find alternative sources of capital for your business,” he says.

Changes in both the investor and regulatory landscapes have also helped to drive the shift into third-party management. “The retirement funding model is moving from the employer to employee, so individuals making retirement decisions are looking for broader investment content,” says Mark Meiklejon, head of real asset global investment specialists at Aviva Investors Real Assets, the real assets arm group of London-based insurer Aviva.

Meanwhile, Solvency II, a legislative program implemented in the European Union in 2016, directs what types of investments insurers in the 28 member states can hold long term, and calls for such companies to diversify the investment exposure and risk on their balance sheets. “If you can do that through an efficient third-party platform, that certainly helps,” Meiklejon explains.

The industry’s view of insurers’ real estate platforms also has evolved over time. “Ten years ago, it used to be viewed a bit negatively to be the investment management arm of an insurance company – you were considered stable but boring and sleepy,” says Meiklejon. “But now lots of these groups are looking to leverage that stability to grow their third-party management businesses.”

“Ten years ago, it used to be viewed a bit negatively to be the investment management arm of an insurance company – you were considered stable but boring and sleepy”

-Mark Meiklejon

Stability is indeed part of the appeal for some investors. “I would consider having an insurance provider as a GP within our portfolio to be a ‘GP diversifier,’” says Tony Breault, senior real estate investment officer at Oregon State Treasury, which has yet to commit to such a platform but has been in dialogue with several groups. “One of our largest risks in our real estate portfolio is our counterparties/GPs. Insurance companies tend to be less opportunistic by nature, have good stability within their platforms and could make a good fit with a pension plan’s investment objectives and time horizons.” Also attractive is the co-investment from the insurance company, which can be significant and help to improve alignment, provided all parties agree on the investment objectives, Breault adds.

Transitional difficulties

The shift from pure asset management to third-party management, however, comes with multiple challenges. “Putting clients in the middle of the table of the organization that has been used to captive business is a mindset shift,” says Mazzocco. “It is one thing to report to a colleague, it is another thing to report to a third-party investor.”

Indeed, firms may seek to bring on new investment staff as part of such a transition. “As insurers build out their third-party investment offering, they will normally look to build across those different risk profiles that the insurance parent company won’t typically have invested in previously, so will look to supplement the existing investment team capability with new skills,” Meiklejon says. “This is a complementary rather than changing capability, and one which has underpinned a lot of our hiring decisions.”

In some cases, however, the shift has led to significant turnover at some firms. For example, PERE understands that more than half of the US real estate team at Nuveen has changed over since TIAA, a retirement income and life insurance provider to US teachers, acquired the real estate assets of investment manager Henderson Global Investors from 2013 to 2015. Much of the turnover is said to be the result of TIAA’s transition from a captive asset manager to a third-party asset manager, a change that began about a decade ago and has required some staff to pivot to more market facing roles, focusing on external clients’ needs and developing new products to suit those needs.

Mazzocco says the first question the insurer is typically asked regarding its new third-party management business is the potential conflicts of interest between managing multiple funds and joint ventures on behalf of external clients. In anticipation of cases where an investment would be appropriate for multiple clients, Generali has established internal procedures to make the allocation, utilizing a draw by notary if necessary, he says.

Lavergne says insurers now entering third-party management may face difficulties in making inroads in the space: “It’s always hard to start without a track record serving clients. There’s always a question mark if the team will favor its parent company versus the third-party business and that third-party will be a second-rate client. It will be a long road in that way.”

Breault: open to investing with insurance companies

Breault, however, says he would “definitely” consider investing in a fund sponsored by an insurer that has a long investment history in real estate but relatively little third-party management experience.  That said, the pension plan would prefer the fund or investment offering to be lower-risk, longer-term and in an open-ended or separate account structure, rather than a closed-ended fund.

As for potential conflicts, he says he has not observed that to be an issue: “From our perspective, we try to understand what the balance sheet – ‘company client’ – portfolio objectives may be and then ensure our objectives and investment theme avoid overlap or competition as much as possible.” If Breault’s comments are any indicator, a long road ahead for Generali, Allianz and Munich Re’s fundraising efforts may not be a given after all.