If there is one area in which the world’s biggest property brokerages have tried and struggled to be competitive, it is capital raising and placement. Today, JLL, the world’s second largest publicly traded brokerage, believes it has found the ingredients to break the trend.
The Chicago-based firm has been on a hiring rampage in its bid to break the market dominance of the private real estate world’s boutique placement agents, regularly the preferred option for the sector’s most lucrative fundraising mandates. It has dedicated resources to the task, poaching executives from its rivals: in the last two years, JLL has hired from Hodes Weill, Lazard, Shelter Rock and others. The firm did not disclose the cost of its recruitment effort.
The effort is part of a wider push by JLL to dominate real estate capital markets, an effort bolstered by its impending $2 billion acquisition of US transactions services firm HFF, announced last month, a deal which brings another 400 staff to its 82,000-strong business.
“I’d like to think we’re placement agent 2.0,” states Matilde Attolico, one of the poaches from rival Hodes Weill, responsible for leading and growing a global fund advisory business that now has 24 people.
Despite the rapid headcount expansion, the mission still has hurdles, onlookers say. Chiefly, JLL will have to overcome structural challenges that have plagued other brokerages in the past, such as higher staffing costs, longer dated revenue models and conflicts with its more traditional services, according to several senior rival placement agents. PERE hears how other brokerages have failed in the past to turn their fund advisory offerings into meaningful profit centers before exhausting the patience of their stakeholders.
“Other services provide recurring cashflow and are much more scalable than placement, which is always going to be a small business trapped in a big business’s body,” one capital raiser tells PERE. “If you overlay that with the inherent volatility of the stock and pressure to react to that volatility, one of the easiest things to underinvest in – or shutter – is a placement group. It’s a mismatch right out of the gate.”
New entrants in the placement business typically add a few veteran agents and pair them with advisors repositioned from other specialties, another long-time capital raiser tells PERE. Even such small outfits are expensive and constrained by multi-year payment models, making them early casualties during times of economic distress. JLL, however, has not been deterred by the low success rate of others as it goes about assembling a who’s-who of real estate capital advisors.
It has not only hired talent away from top placement agents, but also fiduciaries from managers such as Swiss bank UBS’s real estate business and private equity real estate giant Brookfield, as well as real estate specialists from institutional investors, including Korea’s National Pension Service. Newly-minted group leaders are based in London, Los Angeles, New York, Seoul, Singapore and Tokyo. “We’re a very young and dynamic team,” Attolico says. “We’re told by investors that we bring a lot of energy to the industry.”
The rapid recruiting drive has had the odd mis-step. An LA-based distribution banker hired to the global fund advisory business in September 2018 filed an employment claim last month after being let go in December, for example. JLL announced its intention to defend itself against the claim. That conflict aside, the group remains bullish on recruitment: three further hires stateside are expected in the coming months.
Now with a full bench, JLL will expect to see the mandates start to flow. It is early days since this platform’s supercharged latest iteration entered the market in the third quarter of 2018, but the firm has already disclosed an assignment, albeit a small one: Slate European Retail Fund III, for which it is targeting a €200 million raise.
A sector hard to quantify
JLL, like other brokerages and investment banks, had a more substantial placement team before the global financial crisis forced it to downsize. It has since maintained a presence in the space but struggled to make a dent in an industry dominated with familiar, boutique practices. “JLL has been in and around this space for well over 25 years,” Richard Bloxam, JLL’s head of global capital markets, says. “We just haven’t put the accelerator down in the way we have now.”
Between 2015 and 2018, the top 10 capital raisers secured mandates for 77 funds totaling roughly $65 billion, according to data aggregated by JLL’s research. The data is contextual, not conclusive. Included are renewals and capital secured by managers themselves for instance; furthermore, undisclosed mandates are not included. Nevertheless, that approximation accounts for roughly 12.5 percent of the $520 billion committed to closed-end vehicles during the same period. The next three biggest firms secured $6 billion in mandates – beyond that, the figures become indecipherably patchy. In total, just 92 out of more than 1,000 closed-end vehicles used one or more of the top 13 placement agents, JLL estimates.
But amid that fragmentation, the firm sees an opportunity to enter the fray and leverage its global infrastructure to build market share. Bloxam says that belief is backed up by client demand. “The primary reason for doing any enhanced service is in response to client requirements and needs,” he says. “They have been looking for someone deeply involved in the real estate world to add capital raising of the caliber that we’re now doing as part of our armory.”
JLL has also staked its wager on the backs of several secular trends it sees developing in the market, including increased interest in real assets, manager demands for global capital and steady growth in urban markets. An emerging preference among investors for structures other than comingled funds also plays to JLL’s advantage, Bloxam says, as direct deals, joint ventures and recapitalizations fall under the firm’s broader umbrella of services.
With those other businesses all under the same roof, one New York-based capital raiser cautions JLL should avoid positions in which other relationships in the firm influence its decision-making. “They need to have the ability to say no,” he says. “When you have a firm with lots of real estate relationships, there’s lots of pressure to say yes.” Top-tier placement agents can field upwards of 200 pitches a year but only take on a handful of mandates at a time, he points out.
In reply, Attolico says there will be a “great wall” separating conflicting portions of JLL’s business – particularly LaSalle Investment Management, its $60-billion assets under management investment management arm. But the firm will share data where appropriate to help clients make informed decisions. The global fund advisory business will be backed by the full reach of JLL’s research team, for instance.
Due care and consideration
The perks do not outweigh the issues, JLL’s placement rivals say. They question how resources will be split in lean times and how a high-cost placement team can stave off execution when decision-makers come from a brokerage background. Some are skeptical of the ability for these divergent cultures to withstand leadership change.
“It absolutely can co-exist. But, in order for it to do so, it requires long-term understanding of the business by any large house that decides to get into placement,” a European capital raiser tells PERE. “To me, that is the over-riding mismatch. That long-term understanding implies when management changes, every new management must buy into that same rationale. The reality is that doesn’t happen.”
Bloxam, a member of JLL’s executive board, pushes back on the notion the firm would
abandon the placement business at the first sign of trouble. Indeed, he counters that placement will play a key role in JLL’s plan to double its capital markets revenue by 2025. Last year, that part of its business accounted for more than $1.1 billion or 17 percent of JLL’s total fee-based income. “We’re a listed company. We have responsibilities to our shareholders. So, we don’t do this without due care and consideration,” he says.
Attolico adds that, unlike the investment banks that shed capital raisers en masse during the global financial crisis – a bloodletting that led to the creation of prominent independent shops such as Hodes Weill, Park Hill, Shelter Rock and others – JLL will not treat its global fund advisory as an island.
With nine years of experience at Merrill Lynch before helping found Mercury Capital Partners in 2009, Attolico says placement groups were easy to cut during the global financial crisis because they were run largely independent from their broader institutions. Her group, on the other hand, aims to integrate as much as possible.
“Having been in the placement business a long time and learning from some of the best people in the business, we’ve tried to create a business that’s very differentiated,” she says. “We’re part of a Fortune 500, global company committed to real estate, that lives and breathes real estate every day. A lot of the boutiques, the small independent companies, don’t have that scale or connectivity.”
At the core of the debate about the viability of capital placement for brokerage houses is the question of whether fundraising works best as a local or a global business. JLL is banking on its ability to balance both; skeptics believe managers have no use for jacks of all trades, masters of none.
One longtime placement agent characterized the industry as inherently niche. While there is growing demand for global investment, the large managers seeking diversified pools of capital can fundraise independently. Meanwhile, he said, the small- and medium-cap managers most likely to hire a placement agent are usually looking for an answer to a specific problem.
“The space left for placement agents to play in is with the mid- to small-size boutique managers,” he says. “Most of those have strategies or funds that appeal very heavily to one region, not far beyond. What tends to be most successful in the current market is having a regional specialization.”
Broader market activity does not necessarily support this claim. Prominent placement agents are consolidating or teaming up to expand their geographical reach. New York-based Shelter Rock, for example, created a joint venture with Matrix Japan, an alternative investment advisory and placement firm in Tokyo in 2017, then forged an alliance with Penmount Partners, a Singapore-based firm started by industry veteran Philip Levinson last May. Both moves were aimed at gaining exposure to investors in Asia.
A logical progression
Sonny Kalsi, co-founder and partner of New York-based manager GreenOak Real Estate, sees this type of consolidation as a logical progression for the market and one he believes will continue in the immediate future. Having a global reach, he said, is an increasingly important attribute for capital raisers. “Many placement agents are regional and increasingly most managers need advisors that can give them access to capital globally,” Kalsi tells PERE. “That’s the advantage an investment bank has and that’s the advantage a global brokerage like JLL has.”
Since JLL is already active in so many markets, Attolico believes her team will be able to deliver ground-level expertise to investors when presenting opportunities to them from around the world. “We have made a big commitment to building a global platform that is very local in nature,” she said. “We have people all the way from LA to Tokyo and that is to deliver that promise to our clients that we really understand capital in each major market.”
JLL’s platform has a geographical spread which unquestionably puts it in a better position than most of the sector’s capital raisers in terms of its reach. It has a powerful brand too. However, questions remain about what message that brand conveys to this part of the real estate industry. Established placement agents feel their firms have a distinct advantage in being known specifically for their capital raising expertise. While JLL may be more widely known, they say, they are known better by the people who matter most: clients. A robust track record gives a legacy capital raiser greater cachet when pitching to investors, one agent tells PERE. “It’s about reputation,” he says “We are low volume, highly selective. They are mass-market.”
Arguably more critical is prowess with private real estate’s investors, relationships which placement agents need to possess and constantly nurture as they service mandates. One executive at a US pension fund said the individual placement agent carries more weight than an agency brand. For him, talent retention is crucial, and that has been a challenge for brokerages in the past. Smaller, independent placement businesses traditionally have more freedom to pay more than large, public companies. To that, Bloxam says the goal is to incentivize people to stay by providing support mentorship and a collaborative work environment.
“Culture is very important to us,” he said. “We’re very focused on teamwork and ethics, we’re one of the world’s most ethical companies as rated by third parties and excellence is at the core of everything we’re trying to do. That combination, I hope, is very compelling.”
In its early stages, JLL’s latest attempt at forming a profitable capital raising team is already its biggest yet. Whether its naysayers are right will be known in time – but that is something JLL says it has in abundance. As Bloxam puts it: “This is a long-term play for us and that’s why we’re committed to bring the very best people on board to integrate with all the other activities we do in the broader capital markets business and beyond.” With this patience and its extensive pocketbook, JLL expects to do what no brokerage has done before – make a placement agency offering really competitive.