Even during a global commercial real estate slowdown, Ted Gooden and Drew Murphy can be difficult to pin down.
As our issue was going to press, Gooden, head of the private markets advisory practice at Berkshire Global Advisors, and Murphy, head of the real estate practice, were busy completing their fourth real estate M&A advisory transaction of 2020 – the sale of Benson Elliot Capital Management to PineBridge Investments.
The deal capped a year in which the New York-based investment bank also advised on Almanac Realty Investors’ sale to Neuberger Berman, RXR Realty’s minority stake sale to Neuberger Berman’s Dyal Capital Partners and Spear Street Capital’s minority interest sale to Aberdeen Standard Investments’ Bonaccord Capital Partners.
Despite the covid-19 crisis, Berkshire has maintained its same real estate activity level as over the past half-decade, averaging about four deals a year. Meanwhile, overall M&A activity in the sector has plummeted over the past two years – from 44 deals totaling $7.2 billion in 2019 to 14 deals totaling $2.1 billion in 2020 year-to-date – in tandem with a general decline in commercial real estate investment volume, according to Berkshire data. The data represents full, majority or minority stake sales of private real estate or real assets managers. It does not include privatizations of listed real estate investment trusts.
The firm’s dominance as an M&A advisor can also be seen in its representation of managers on the PERE 100 ranking. Of approximately 20 firms that have bought or sold a private real estate manager, Berkshire has represented a dozen.
“They’re on just about every single transaction, representing the companies themselves or the management teams,” says Jay Mantz, president at Miami-based Rialto Capital Management, which counted Berkshire as one of the advisors to the Rialto management team in their joint acquisition with Stone Point Capital of Rialto from Lennar Corporation in November 2018.
Berkshire’s capture of significant market share in private real estate M&A is “not a coincidence,” Murphy says. “We’ve been very strategic about how we think about creating relationships and marketing within the space. This is going back to seven years ago, when we ramped up our efforts in what we were doing. The deals are really just a byproduct of all that.”
Evolution in private markets
While Berkshire’s private markets advisory practice had worked on a few real estate manager deals over the years, “we kind of grew up with the industry over the last 12 years since the financial crisis,” says Gooden.
Prior to the global financial crisis, Berkshire had talked with numerous private equity firms such as Blackstone, Carlyle and Apollo as they went public. Post-GFC, the firm sold a number of credit investment managers to those private equity shops, which went on to build substantial businesses in credit and then expand into real assets and other related areas. Insurance companies then followed suit with their own expansions into private markets, followed more recently by mutual fund companies and a rise in cross-border investment in private real estate M&A.
“The confluence of all of this now means there’s an intense demand from all sorts of organizations to grow their private markets business, and real estate has been the most active area,” Gooden explains. “So, combining some of my long relationships with these organizations working on the private markets side with Drew’s real estate relationships and knowledge, we’ve combined forces where we’ve got really nice coverage and a capability set.”
A case in point was Berkshire’s work with Mesa West Capital, a Los Angeles-based commercial real estate portfolio lender on whose sale to Morgan Stanley Investment Management in 2018 the firm advised. Berkshire began talking with Mesa West four years earlier, when Gooden was working on multiple credit manager deals and the firm could also see an uptick in interest in real estate at the same time. “It seemed obvious that real estate debt was going to be an area of interest for some of these groups,” Murphy recalls.
With Mesa West, “Ted and I took two skillsets and manifested them into a deal that was strategic,” he explains. “Almost every deal that we work on, there’s some element of that strategic planning behind what’s the story and the compelling features of the platforms that we’ve worked with.”
Connectivity and ‘extreme knowledge’
But while it targeted certain relationships, Berkshire has also expanded its network in private real estate through word-of-month. “One of the things we’ve benefited from, and capitalized on, is the relationships of these managers with each other,” Gooden observes. “They know each other really well and the referral base therefore is really, really strong because there’s not so many managers… The connectivity in this sector of real estate has allowed us to gain the trust of a lot of really exciting managers.”
For example, Mesa West as a real estate lender is well-connected to all the real estate equity firms, to which it has referred business and provided introductions to Berkshire.
“Every deal we’ve done comes with referrals,” Murphy says. “And if you think about what that means today in a covid-impacted world, normally Ted and I are out traveling all the time to see our friends and clients, to create new relationships. Without being able to do that, our existing relationships are proving to be just fantastic and supportive of us and the growth of our business because they’re referring us to their friends, who in some cases we’ve never had a chance to meet in person. I think that trust factor is really important.”
When it comes to potential sellers, “we want to know the whole universe,” he notes. “When we’re asked by potential buyers about the universe, we’re expected to be able to talk to almost every firm and I think we do a pretty good job of understanding what the landscape looks like.”
Indeed, Ajay Chitkara, head of Bonaccord Capital Partners, notes that “a core competency” of Berkshire’s is their relationships in the real estate space. “They have a reputation for that, so it’s not happenstance that they happen to have gotten a lot of the real estate opportunities,” says Chitkara, whose firm buys minority stakes in private markets managers and made its first real estate investment in July with the Spear Street transaction. In fact, “the real estate opportunities that we’ve looked at have primarily come from Berkshire.”
And those relationships include both sellers and buyers, Chitkara adds: “They actually know how to talk about Bonnacord to the potential seller. They know what value we’re going to bring, because they just spent time building a relationship with us… They can talk about the buyer in great detail.”
Such expertise is also a draw for Berkshire’s clients. Prior to exploring a sale, Christopher Merrill, chairman and chief executive of Harrison Street, would reach out to Berkshire to better understand the market. “What they brought to bear was extreme knowledge of the real estate space,” he says.
That deep industry knowledge also stood out to Matt Kaplan, managing partner at Almanac, when the New York-based firm hired Berkshire on retainer in June 2018 to help field inbound calls from potential buyers. Of the firms Kaplan interviewed, “Berkshire was clearly the most knowledgeable about this very specific space,” he says. “They knew all the players and all the companies. The span of their knowledge went from ‘who’s the CEO’ and ‘what does the company need strategically,’ to ‘what specific terms you should get on key issues.’ It was a very impressive interview.”
‘High integrity folks’
M&A deals are typically years in the making, Murphy notes. “It takes a process to get somebody just to be ready to be prepared to even entertain external options,” he says. “It’s a multiyear lead-up in most cases to helping groups think through their evolution as a firm and then being there when they’re ready to execute on it.”
Merrill, who has known the firm for about two decades, concurs: “You need people that have patience and play the long game.” He notes that two to three years before selling a majority stake to Colliers International in 2018, Harrison Street was approached by a potential buyer, but Berkshire recommended not pursuing the deal. “They advised this deal wasn’t the right structure or the right partner. To me, that says a lot about an organization that’s willing to walk away from certain fees if they don’t feel it’s right for their client.”
Calling Berkshire “high integrity folks,” Merrill adds that the firm’s independence as an investment bank was also important: “There are other firms that provide similar services, but may also have their own product offerings. That’s not a bad thing, but it’s nice to have that independence that they offer.”
Kaplan also observes that unlike many bankers, which typically step back from the sale process after an agreement between the buyer and seller is signed, Berkshire remained heavily involved in negotiations until the transaction closed: “On just about every single call when we were negotiating, they were there for advice on negotiations and deal terms.”
From late summer to early fall 2018, as the firm prepared for its sale process, Almanac would meet with Gooden, Murphy and other members of the private markets team on Sundays at Berkshire’s offices in Manhattan. “Because we were running a business, we had to keep our minds on that, so we met outside regular business hours,” Kaplan explains. “There wasn’t even a question in their minds whether that made sense or not.”
Berkshire comprises approximately 50 people globally, three-quarters of whom work out of the firm’s New York headquarters, along with teams in London, Sydney and a couple of regional offices in the US. The firm’s private markets practice is the largest of its verticals, which also include investment management, wealth management, financial technology and securities and investment banking. Although the headcount can vary depending on transaction activity, the private markets group currently encompasses about 10 dedicated professionals, along with a team of analysts that work across the firm’s businesses, according to Gooden.
In preparing clients for a sale, Berkshire will help potential sellers with financial modeling or presenting how the business will build out over time based on current product lines and existing or future initiatives. The firm also helps to determine what buyer will be a good fit for the seller.
“We’re going to be able to tell them what’s realistic about their prospects,” says Gooden. “In some cases, we help them reshape and develop their company in ways to become more marketable in terms of products or ownership structure or incentives or next-generation talent.”
Multiple complexities also need to be addressed, including the interests of various stakeholders, Murphy says. “There’s always a huge element of how are potential investors going to think about a relationship and are your employees going to be happy with a transition? Sometimes, that’s crafting the right story, making sure that those employees have a positive view of it and, potentially, upside participation.”
Pricing presents an additional challenge. “The buyers have limits, because they’re in the business to be earning a return for their shareholders,” says Gooden. “They understand that these moves can be strategic. But eventually they do want to make money. And the sellers, generally it’s what you learn in business school. The groups that have the most to gain should be willing to pay more, and so you hope that aligns. But sometimes it doesn’t.”
However, Murphy points out that price has not prohibited any of the real estate transactions that Berkshire has worked on. “It’s a challenge. But there’s definitely a better appreciation today or over the last couple of years for how valuable these businesses are,” he adds. “It’s less of a discussion than going back a number of years ago.”
Indeed, Murphy says manager valuations have continued to trend upward, even during the pandemic. He points to the performance of publicly-traded private equity firms like Ares, KKR and Blackstone – all of which have seen share prices rise since March – as a key indicator of what manager pricing looks like in the broader private markets should look like.
Although activity slowed down earlier in the year, the covid-19 crisis has not changed the motivations for why some groups would be seeking an M&A transaction. “If anything, covid highlights a couple of the industry trends out there around asset allocation and potentially being part of larger organizations that have broader product suites and just generally being able to be in front of LPs more frequently or just having more global resources, or, to a certain extent, scale,” Murphy says. He adds he has not seen distress in the firm’s deals, as managers seeking an M&A transaction are not doing so because they are in a distressed position.
What has changed is the buyer landscape, as some prior participants have withdrawn from competing on deals because of public market pressures or general conservatism. With some of these groups now on the sidelines, new entrants have emerged in search of a strategic partner or M&A opportunity, Murphy explains.
While private real estate managers represent a finite universe, he does not expect to see a significant change in M&A activity in the years to come. “There’s a lot of entrepreneurialism in the space,” Murphy says. “I don’t think the independent manager is going away. There’s always going to be the next set of groups that are maturing into that phase and eventually seeing their own options. Buyer organizations are going to need certain capabilities that they don’t have. You’re going to continue to see the landscape change and evolve.”
BERKSHIRE’S RECENT DEALS
Benson Elliot Capital Management/ PineBridge Investments
SpearStreet Capital / Bonaccord Capital Partners
RXR / Dyal Capital Partners
Almanac Realty Investors/ Neuberger Berman
Aquila Capital / Daiwa Energy & Infrastructure
Pennybacker Capital Management / Pacific Current Group and Kudu Investment Management
RCG Longview / CenterSquare Investment Management
GreenOak Real Estate/ Sun Life Financial & Bentall Kennedy
Rialto Capital Management (advice to management) / Stone Point Capital
Latitude Real Estate / LaSalle Investment Management
Westbrook Partners / Goldman Sachs’ Petershill
Harrison Street / Colliers International
Mesa West Capital / Morgan Stanley Investment Management
Stockbridge/ CITIC Capital
Internos Global Investors/ Principal Global Investors
CIM Group / Mitsui & Co
Note: Names included are seller/buyer. The bolded party is the party represented by Berkshire