Luck, judgment and money: who made the most of the recovery

A handful of organizations found they were unencumbered by their pre-crisis dealings, able to recognize bottoming conditions and could access the capital to get investing again. They became the post-crisis winners.

“In hindsight, 2009 was the perfect time to buy. But not many managers or investors did deals then. They thought things would get worse,” recalls Paul Jayasingha, global head of real assets at London-based consultancy Willis Towers Watson.

Those that did get buying as the embers of Lehman Brothers cooled, today dominate the private real estate marketplace. Among the first out of the traps, and now leading the property investment management space, was New York giant Blackstone. Over a decade, the firm snapped up more than $178 billion of real estate around the world, according to Real Capital Analytics. In fact, the transaction data provider estimates Blackstone purchased approximately four times more property than any other organization during the period.

Global co-head of real estate Kathleen McCarthy believes the firm’s post-global financial crisis fortune was, in part, down to only having deployed a fraction of its live global opportunity fund at the time, Blackstone Real Estate Partners VI. With just 40 percent of the $10.09 billion fund invested, it had a sizeable war chest for bargain hunting. “And the older funds had significant reserves,” she adds.

But McCarthy also credits sensible deal and finance structures, agreed before the crisis, as well as her colleagues’ scrutinizing of the firm’s already meaningful holdings – Blackstone had managed some $132 billion of investments since its inception and prior to closing BREP VI – for clues as to when and where a recovery would happen.

The firm’s investment program kicked back into gear in the fall of 2009, and in the world’s biggest market, the US. “What really motivated that was a real discipline around looking at the current portfolio, talking to tenants, understanding what was happening on the ground. The team recognized things were starting to get better before others.”

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If BREP VI pushed Blackstone Real Estate into private real estate’s pole position, its subsequent vehicle, BREP VII, which corralled $13.3 billion in 2011, crystalized this position. Conditions were primed for the firm to capitalize. “It was a distressed marketplace,” McCarthy recalls, “and the competitive landscape had changed substantially.”

Blackstone’s eminence post-crisis was trailed, to one extent or another, by other US private equity firms, many of which had limited or no market presence beforehand.

TPG Capital, KKR and Apollo were among those to seize the opportunity to fill the void left by investment bank platforms to grab market share. For some, their private real estate businesses were bolstered by acquisitions from the sector’s old guard. Blackstone inherited Merrill Lynch’s Global Real Estate Investment Principal Investments business in Asia following its merger with Bank of America. Facing curtailing regulation and various issues with its platform, BoA wanted out of the market. Citigroup wanted out, too, jettisoning Citi Property Investors to Apollo. American International Group, meanwhile, also ran a private real estate operation before selling it to Invesco Real Estate.

How did your organization operate in the recovery?

Paul Jayasingha, global head of real assets, Willis Towers Watson

Jayasingha, recalls how Towers Watson (prior to its merger with Willis Group in 2016) was positive on real estate as early as 2009, as Lehman’s collapse was still being broadly assessed in the market. But the firm felt the biggest opportunity lay in the listed space. “We thought about the various private funds but felt better about the REITs. Most were trading at 30 percent or more discounts to NAV. It was the simplest thing they could have done.”

Private real estate’s new order has made the most of the recovery, both in terms of capital deployment and raising. RCA has recorded $37.5 billion of real estate or real estate-related investments by Apollo, $35.5 billion by TPG and $39.8 billion by Invesco since the crisis, each of them making the researcher’s top 10 most acquisitive list in the period. Of the top 10 closed-ended private real estate fundraisers in that time frame, six were private equity firms, according to Real Estate Capital’s research and analytics.

Three keys to success

These firms, alongside various institutional investors in the early throes of establishing or executing global expansion plans, were among a much-reduced cohort of buyers in a post-meltdown market. They benefited from a trio of factors: fortunate timing; judgment to underpin their convictions; and, critically, the money to get deals done.

One such investor was Korea’s National Pension Service, which had just $200 million committed to international commingled funds when the crisis struck. Andie Kang, who led cross-border investment at the time, recalls: “When we saw the market price for core assets went down to 30-40 percent from the previous peak in 2007, we decided to actively buy prime assets in major gateway cities.”

How did your organization operate in the recovery?

Mike DiRé, director of real estate, California State Teachers’ Retirement System

CalSTRS tactically bought back some of the debt on its assets at a discount, thereby lowering its leverage and generating some profits. But with much of its real estate capital tied up in closed-end funds and the pension plan having less capital overall due to the drop in the public markets. “I do recall our team being very frustrated that we lacked the capital” to do more distressed deals, DiRe said.

Kang joined Seoul-based manager IGIS in 2011, by which point NPS had accumulated $11 billion of international assets, one standout deal being its £772.5 million ($992.52 million; €870.4 million) purchase of the HSBC Tower in London’s Canary Wharf in 2009. It sold the 44-story tower to Qatar’s Investment Authority for more than 40 percent more two years later.

Another was the Netherlands’ APG Asset Management. When global real estate head Patrick Kanters took charge in 2005, the pension manager’s property holdings were entirely domestic. Recognizing Dutch office prices were cyclically toppy and APG was overexposed to the asset class, Kanters sold €1 billion of offices immediately before the crisis. “With hindsight, we perfectly timed that one,” he says. “It freed up a lot of capital which we could use after the GFC to reinvest.”


Unlike Blackstone or NPS, which prioritized distress, APG used the proceeds to make long-term strategic purchases, such as its 2010 investment in the €1 billion development of retail specialist Westfield’s Stratford City mall in London. “We made sure we got exposure to the very best locations and assets,” Kanters recollects. The call paid off. APG’s real estate fund produced a 19.4 percent annual return between 2009 and 2015, outperforming the industry benchmark by 10 percent, according to the pension manager. Today, it is second on PERE’s Investor 50 ranking with a $45.11 billion portfolio.

China’s pre-eminent sovereign wealth fund was another to make opportunistic but strategic outlays. “I was very lucky at that point of time to take the helm,” remembers Collin Lau, China Investment Corporation’s first global real estate head.

Lau joined the sovereign wealth fund at the end of 2008, a year after it was established. His timing could hardly have been better. Up for grabs were blue-chip real estate and operating companies that, but for capital structures rendered untenable by the crisis, would be well positioned to capitalize on demographic and technological change. Lau set about acquiring as much as possible.

Among CIC’s notable deals were: the 2009 recapitalization of Sydney-based logistics investment management giant Goodman via a A$200 million ($146.3 million; €127.6 million) debt facility, negotiated with share-conversion options; participation in the purchase of £255 million of preference shares in Canary Wharf landlord Songbird Estates the same year, and; the pick of them all, teaming up with Brookfield Asset Management for its $6.5 billion investment in GGP, a deal which took the operator of 200-plus US malls out of bankruptcy.

Those deals, struck at cut prices, are understood to have been among about $5 billion of equity outlays made between 2009 and 2010 – the value of which is thought to be more than $12 billion today. Lau declines to discuss specific details of this deployment but concurs the state fund was “in the right place at the right time.”

Long-term gain

CIC’s capital for the GGP rescue was channeled through a club vehicle called the Brookfield Real Estate Turnaround Consortium, essentially a “pledge fund” backed by large institutions. Besides Lau’s then-employer, Australia’s Future Fund, Singapore’s GIC, Canada’s Pension Plan Investment Board and Public Sector Pension Investment Board, and Cleveland-based consultancy Townsend, representing a selection of advisory and discretionary clients, alongside Brookfield, pledged up to $5.5 billion of equity to the vehicle.

Its non-discretionary basis was initially derided by Brookfield’s rivals, that branded it a desperate attempt by a manager to break into traditional fund management: its management fee was negligible and a set of investors that otherwise would struggle to access deals was getting a free ride on its pipeline.

Brian Kingston, Brookfield’s chief executive officer, admits such an offering would be unthinkable today. But he says it was exactly the right way to tackle the post-crisis opportunity. Recalling boardroom conversations at the time, he says: “The challenges were: a) what to buy; and b) where to get the money.”

Like Blackstone, Brookfield had manageable debt situations to handle, including from its A$4.2 billion purchase of Australian builder Multiplex in 2007, but was largely unencumbered with problems from the existing portfolio. At the same time, it was digesting a world of property that was, officially or, at least ostensibly, in play. “We could basically pick and choose anything. If we were going to be a contrarian investor, the ultimate contrarian investment opportunity was now,” Kingston reveals.

Reflecting on how most institutions were weary of traditional, blind-pool, commingled funds, Kingston says the Turnaround Consortium was the only way to capture large equity checks from the world’s biggest institutions. “There was no way these guys were going to go to their investment committees and recommend they deploy more money into discretionary funds. So, we decided it was better to get the capital on the terms we were able to.”

 The call led to IRRs of more than 40 percent from the $4 billion of the equity deployed in the 18 months that followed. Brookfield had forgone a management fee for massive gains on its own investment and, more importantly, substantiated its investing acumen for the benefit of some of the world’s most prolific post-crisis investors. The consortium’s deals formed the early parts of their post-crisis investing programs, which have since ballooned. GIC has deployed $47.95 billion in the decade following the crisis, CPPIB laid out $41.87 billion and CIC invested $30.2 billion, RCA has recorded.

Brookfield, meanwhile, used the performance of the Turnaround Consortium to kick-start its global opportunity fund series that has now garnered $25.6 billion, propelling the Toronto-headquartered organization into the number two spot on the PERE 50 ranking of managers by capital raised. Kingston says most of the club’s investors returned for its fund series. “Being long-term focused is what that was, focusing on fantastic opportunities to put capital to work while developing relationships with these clients which have continued over the last decade.”

Brookfield, Blackstone and a limited handful of peers monopolized a returning private real estate fundraising market that had bifurcated into two: mega-managers like them, able to pursue broad themes and invest at scale; and niche practices, focused on particular asset types and geographies. They would mop up most of the small- to medium-sized investors keen to access recovering markets, while the largest institutions would scale down their manager relationships via a strategy through which they committed greater amounts to smaller numbers of managers. Indeed, almost half the $333 billion aggregate of the last PERE 50 ranking was raised by managers in the top 10.

The largest investors would also return to participating in the mega-funds, but place a far greater onus on joint ventures and club deals. Often hiring executives from the very managers they previously backed, nowadays, they are sophisticated and competitive investors in their own right. Indeed, their transformation could be credited as another major outcome of a crisis that saw institutional real estate investing cross a Rubicon and enter a paradigm still apparent today.

How did your organization operate in the recovery?

Rainer Komenda, head of real estate funds, Bayerische Versorgungskammer

In the wake of Lehman’s collapse, BVK remained cash-rich and faced no liquidity issues, according to Komenda. The pension fund was back investing in the market by November 2008, taking advantage of opportunities where the seller was under pressure. “The kinds of deals we saw, they were the best parts of some of the portfolios that would never have been transacted,” he said. “We got phenomenal prices where we could buy these deals.”

Rise of a new way

Pre-crisis vintages of primary funds gave life to private real estate secondaries

The trading of fund positions in private real estate was a rare occurrence as the financial crisis struck. According to research by secondaries investment manager Landmark Partners, less than $1 billion of trades happened in 2008. Fast-forward to now and the market yields an average of 400 percent more deals a year.

Not that the sector materialized immediately after Lehman Brothers’ collapse, explains Andy Nick, managing director in the capital advisory group of Greenhill & Co. “I would say 2011 to 2012 was where we saw the market pick up. Real estate secondaries really came of age at that time. Secondary buyers were able to pay higher prices for assets as a percent of NAV than they had historically, given valuation levels at the time and the prospect of a prolonged market recovery, which, in turn, led to increased seller activity.”

Nick recalls US endowments and foundations as the sector’s first notable sellers. “Not massive sales, say $100 million to $400 million,” he notes, adding the biggest sales happened in 2015 when some of America’s main pensions joined the fray. Among the notable sellers was the California Public Employees’ Retirement System, which offloaded $3 billion of fund positions to Strategic Partners, the secondaries platform of Blackstone. “After CalPERS and a few other pensions embarked on these sales, that’s when pensions started to play a bigger role,” recalls Nick.

Such deals established secondaries as a viable portfolio management tool as well as an investing mode for the sector. This was not lost on institutions on the buy-side. Consequently, more than $16 billion has been raised for real estate secondaries funds since 2008, according to PERE data, demonstrative of a growing investor base keen for a bit of the action.