NEWS ANALYSIS: Citi's three suitors

The sale of Citi Property Investors would mean different things depending on which of the short-listed buyers wins the race to buy the platform. PERE illustrates some pros and cons of each bid.

By the end of the month, one of Macquarie Capital, ING Real Estate Investment Management or Apollo Global Management, will likely have been chosen as the preferred bidder for Citigroup’s private equity real estate business – Citi Property Investors (CPI).

The winning bidder will have garnered the support of three sets of LPs, for its funds in Europe, North America and Asia, as well as staff at Citi itself, which also invested in the three funds.

According to PERE sources, the bidders on the final shortlist are now assembling in New York ahead of final presentations to Citigroup and the platform’s investors, each hopeful of capturing a business with $8 billion of assets under management.
In anticipation of a final decision, PERE highlights some serious considerations concerning each of the three suitors:
Suitor: ING REIM
Pros: Proven track record, global capability
Cons: Uncertain future, potentially difficult to blend personnel

ING is perhaps the most surprising on the list. The real estate investment platform could be under different ownership in the next few years after parent ING Group announced that the business is to be divested by 2014 as part of a wider strategy to exit from its insurance and investment management business.

Of the three bidders, it could also be the most likely to make CPI staff redundant. This is because it already has a large team in the US, Europe and Asia, however, the loss of jobs might not at the top of the list of LP concerns. For the staff at CPI, however, it does look like the most precarious outcome for them out of the three potential bidders. Regardless of the perspective, job losses arguably leads to the potential destabilisation of the team and nobody benefits from that. Real estate is a people business afterall.

On the flipside, ING REIM is a large, proven real estate investment manager with global capability. In the last year it has already proved itself capable of taking on new platforms as exemplified by the way it took control of Tokyo’s New City Asia Fund Management’s pan-Asia platform last June. In that case, it was voted to do so by the fund’s LPs.

That said, some market observers have suggested (perhaps unkindly) that ING is a stalking horse in this process, to keep the other two bidders on their toes.
Suitor: Apollo Global Management
Pros: No legacy issues, strategic fit for Europe and Asia, Azrack knows platform
Con: Potentially difficult to blend personnel

On the face of it, Apollo buying CPI seems a logical fit, but there are some wrinkles to iron out. It is no secret Apollo Global Real Estate wants a platform in Asia – so acquiring the right to manage the $1.3 billion CPI Capital Partners Asia Pacific makes sense. In Europe, Apollo has an office but again no platform to speak of, so here it makes sense to acquire the European fund of CPI. In these two regions, it is reasonable to believe that CPI staff have a good chance of remaining with the platform. Adding the US CPI fund could boost its footprint in that region, although it already has a team and products in place.

Perhaps more interesting, though, is what a tie-up would mean for ex-CPI chief executive officer Joe Azrack and his replacement, current chief executive officer Roger Orf. Some investors in Citi’s funds were disappointed at Azrack’s choice to leave. How will they react if he were to return to run Citi but under his new guise? Will Orf go back to being number two or head up the European platform? Azrack and Orf, the current head of CPI, are friends, and Orf is an admirer of the man he once called “the grandfather of the property fund business”. Orf was handpicked by Azrack to run the European platform. If Apollo were to run Citi, would Orf remain to report into his old boss or would he want to leave? If Orf were to stay as European head of Citi’s funds, this raises the question of what to do with current incumbent, Neil Hasson. A respected manager in his own right, a palatable position would have to be found for him that all parties could live with.
On a wider perspective, Apollo already has a platform in North America so the blending of staff will be needed. Uncomfortable scenarios where three candidates vie for two positions could also become an uncomfortable reality.
Suitor: Macquarie Capital Advisors
Pros: No personnel overlaps
Con: Ambition to grow platform may be prioritised over managing existing capital.

That leaves Macquarie Capital. This is a candidate with seemingly few constraints. Firstly, it once had a restrictive covenant with MGPA, the private equity real estate business, part owned by parent Macquarie Group, preventing it from competing in the unlisted opportunity real estate fund space. But last year that covenant expired, PERE has learned. Nicholas Moore, the former head of Macquarie Capital and current chief executive officer of Macquarie Group, is said to have challenged his people to expand the business through acquisition. CPI would fit the bill. And on the people front, there could be a relatively seamless transition with Orf slotting in under current joint head of Macquarie Capital Advisors, John Roberts, who is also directly responsible for the Macquarie Capital Funds group.

From the LP perspective, the preservation of capital (or even the growing of it) will be of paramount importance, well ahead of launching new vehicles. Considering that, Macquarie may come up against resistance as CPI’s LPs prioritise managing out its existing funds ahead of the new owners launching more products, which could favour the more experienced Apollo, whose real estate head is already familiar with the assets. 

A decision on which bidder has been chosen is expected very shortly. Assuming the deal goes well, it will be a defining moment in time for whoever wins.