Ivanhoe’s Tresham: bit about courage, lot about heart

Jonathan Brasse: What does Caisse de depot et placement du Quebec (parent company) need from Ivanhoe Cambridge?     

Bill Tresham: The Caisse currently has roughly $260 billion. At the end of 2008, it had $100 billion. At the beginning of 2008, it had $150 billion. They had a bad year. But traditionally real estate has been used as the one active part of the portfolio to give them a jump on what they have. They have $70 billion in bonds to date and around $80 billion in marketable securities. But with private equity, with infrastructure and real estate, they are looking to get a marginally higher return than the index investor.

JB: Let’s have a brief word about Caisse’s activities since the GFC? How has its portfolio generally been performing?

BT: During the rough moments, Caisse’s real estate group sold one asset, in Vancouver, at a 6 cap. But for the last four years our returns are 12.7 percent. Roughly since the GFC, it has been in the range of 13 percent to 15 percent. We’re trying to convince them that it’s going to be 500 base points less going forward, which they accept because they understand the long term nature of things. If you wake up and you say my target allocation for geography is X and my allocation to asset class is Y, you’re an idiot, you can’t do that in our business. The beauty of our thing is we’re able to arbitrage, among partners, geographies, currencies and asset classes.

JB: As you say, Ivanhoe Cambridge has returned 12.7 percent for its parent company in recent years. As a consequence, Caisse has handed over a fair bit of discretion. But you have had to fight for your current level of autonomy too. Can you talk a little about that?

BT: My favourite fighter is Meka Brunel, president of our European group. The best fight we ever had was over trying to buy PointPark Properties in Prague. It’s probably the single best thing that we have done. It’s a logistics deal. It’s a new asset class for us and it was Prague. Eastern Europe seemed like a good idea and what they didn’t realize is that within four months we had tripled the original size of the investment. It’s a bit about courage but it’s a lot about heart. Wherever we go, whether it’s Buffalo or Brazil, we need a partner, and you need all kinds of partners. We do indirect investing, through funds, we probably have $5 billion in equity invested in funds, and that’s lot for guys like us. We don’t control the money, we can’t get out when we want and that is probably a good thing, we leave it in the hands of people who have been through the rough times.

JB: Do you think the money coming over from fixed income world is here to stay?

BT: It really does feel like it. Real estate believe it or not is still fighting for some kind of respect in the world of investing so we’re going to have our first category for the first time ever. Everybody fears these moments of really rapid change. That’s what Caisse fears for sure, they fear rapid rises in interest rates, they are totally sure that cap rates are going to go up at the same rapidity, which they won’t and let’s say that that doesn’t necessarily happen, I think the capital is here to stay.

JB: You deployed $12 billion in 2015 including the organization’s biggest – $3.5 billion for Stuy Town (a big residential complex in NY) – which proved your ability to transact at scale, but also quickly. How is it that your team can react so quickly at that scale?

BT: Total transparency. Total transparency with our partners and everybody we work with. We bring our partners with us wherever we are going and we parade them around. By the time it actually comes to having to act, people probably know the asset. That asset (Stuy Town) we knew for ten years. Forget about when the money transfers, you have to commit to your partner and he has to have the confidence that whatever hurdles you are going to face, you’re going to get a yes when you get to the end of it. In anything you do, you build up your credibility over time. That is critical. Transparency with everybody.

JB: Today you have six or seven of these speed dial partners. Guys that know they can pick up the phone, give you a call and get a decent reaction?

BT: When I joined in 2010 we had 120 partners. That means I can’t have dinner once a year with each of them. We have 30 today. But if you take the six or seven that we have done the most business with our net, after fees and such, return for the last six years was 20 percent. Why wouldn’t you work your butt off to work more with those people?

JB: Is there room for a few more or are you done as far as your speed dials?

BT: No that’s the fun thing. I think if we’re super disciplined, we can pick up a partner every six or nine month. We always try to have deep relationships and I think we’re capable of having more. New countries, new asset classes. Nobody bats a thousand right? We have to make new friends.

JB: At this point in the market cycle, the subject of risk takes on an extra significance. What do you regard as tolerable risk and what do you regard as intolerable?

BT: We have never hedged currency but we are hedging today. Hedging has become more sophisticated, and the penalty for not hedging is severe. I have $2 billion invested in Brazil. It has taken us ten years to build that. Our return on that money, until the beginning of last year, was 20 percent. And after last year it was seven percent. It cost us 700 basis points. So now we’re sitting here saying that is fine because we are going to get all that money back. But will I still be around?

You can hedge in China today. My view is that you should hedge in China. You can hedge in India. You should hedge in India. And we never did. Blackstone doesn’t hedge, Tishman doesn’t hedge. Hines doesn’t hedge. You can ask all the people in our business who don’t hedge. Why? Because they pick the right places. Currency is going to come along, until it doesn’t. But it’s all about your partners. It’s about how they behave in the bad times. And you make your list of the bad guys really quick. It’s hard to get on the good guy list.