This past summer, a firm you may not have heard of called Forum Partners acquired the global real estate securities platform of a firm you definitely have heard of – Citi. It was the outsized egos and personalities of Morgan Stanley’s real estate clientele that really captured my attention. Platt
Some in the market saw the headline and assumed the deal worked the other way around, with Citi swallowing Forum. But these are unusual times. Hence, a firm established just seven years ago took over a major business from one of the largest financial institutions in the world.
The discussion focused on why and how Forum bought Citi’s securities business, and about his firm’s strategy of targeting hybrid securities of international real estate companies. But to fully understand the Forum of today, we had to first learn about Platt’s personal history and his front-row seat to the creation of this asset class.
Platt is the son of a Tennessee textile trader who got his start in finance when he joined Morgan Stanley in 1982.
“I immediately fell in love with the industry,” Platt says. “It was the outsized egos and personalities of Morgan Stanley’s real estate clientele that really captured my attention. “I best not share the name, but the guy who the character Gordon Gekko was supposedly based upon, had taken control of a REIT and I was staffed as part of a team to perform a break-up. To see this swashbuckling character was really an eye opener for a young man from Tennessee. I was captivated by the business.”
Morgan Stanley itself was home to some outsized egos. As a 22-year-old analyst, Platt found himself working in a bull pen with three other junior professionals who would ultimately end up leaders in the real estate market. These included John Grayken, who went on to found Lone Star, Paul Kazilionis, the founder of Westbrook (“one of my toughest bosses”) and John Herbert, who went on to run investment banking for Merrill Lynch in Europe.
Platt recalls plenty of anecdotes about his time with those three men, including a proposed Morgan Stanley-sponsored real estate development which didn’t quite go according to plan and ultimately played a role in what would later become Lone Star.
Also wandering the halls of Morgan Stanley in those days was newly-minted freshman analyst John Carrafiell, who went on to become global co-head of Morgan Stanley Real Estate Investing. Platt recalls an early assignment with Carrafiell where the two helped an entrepreneur who had earned a fortune in frozen pizzas and put it into land development in Orlando. “He should have kept it in frozen food,” says Platt only half-joking.
Around the same time Morgan Stanley started Morgan Stanley Real Estate Funds. The bank integrated the investment banking and principal functions. It meant Platt got to work on principal transactions as well as advisory work. He helped market some of the earliest US REIT IPOs as well as on deals such as Morgan Stanley’s takeover of Red Roof Inns.
Then, in 1993/4, he got asked to go on the road to raise MSREF II. It was an assignment that became fraught with drama. The Morgan Stanley investment team, including Kazilionis, Bill Walton and others, decamped to Tiger Management. Recalls Platt: “I was on the road trying to raise the fund. It was not a fun experience, I can guarantee you. But you learn from adversity.” A baptism of fire, one might say, but the job got completed with a replacement head, Owen Thomas.
After that fund was completed, Platt moved to Morgan Stanley’s asset management arm. Jim Allwin, the former head of the real estate department, had moved to asset management and wanted to start a real estate investment management business. These were still early days for REITs. Consequently, few firms were investing in real estate securities. Against this backdrop, Allwin and Morgan Stanley asset management founder Barton Biggs recruited Platt to build up a securities platform and by early 1995 the firm launched a REIT fund which eventually grew into $2.5 billion of listed and private investments in real estate companies. It became a business that looks remarkably similar to Citi’s securities platform today.
One of the funds the securities group launched was Morgan Stanley Special Situations, which took minority stakes in property-related companies – a blueprint for the Forum model.
It was the outsized egos and personalities of Morgan Stanley’s real estate clientele that really captured my attention.
‘Full of myself’
By the late 1990s, Platt had established himself as a real estate player with a track record and pedigree. It was time for him to clarify its status by breaking away from Morgan Stanley. But his first two moves toward independence ended in unanticipated ways. We were in the middle of the dotcom bust and it was not obvious that we would have a bull run in real estate.
At the time JER had a presence in France to buy distress assets, but it needed a presence in London. It was to be a long-term opportunity, but Platt stayed just a year. “The culture clash in my upbringing at Morgan Stanley and JER’s roots in being a buyer and manager of scrappy distressed assets was a pretty big gulf,” he explains. “And I probably thought I knew a lot more about the world than I did, in hindsight. I was pretty full of myself in those days.” Next, he took a decision to join a firm he thought would be around for decades to come, but again things did not go according to plan.
Bill Sanders, like Joe Robert, was a real estate legend who had founded LaSalle Partners and gone on to establish Security Capital, an audacious enterprise which was the catalyst behind the creation of iconic brands such as ProLogis and Archstone. Sanders asked Platt to help build investment management activities and launch a number of funds in 2000 and 2001.
“One day in December 2001, I was sat down in a management strategy meeting. Bill walked in and said: ‘By the way, we are selling the business to GE.’ It was like a thunder clap. I was absolutely flabbergasted. I thought the business would be there for the next hundred years,” says Platt.
“I found myself unemployed in the spring of 2002. I had not done poorly from the sale of my interest in the firm. So I approached my two key partners, Caroline McBride and Andrew Walker. I offered to put some financial backing behind a new business if they were prepared to forgo salary until we were making some money. Little did we know that would take 18 months. But it was a great time in hindsight to get started in business and to get people of this calibre on a voluntary basis.”
Adds Platt: “We were in the middle of the dotcom bust and it was not obvious that we would have a bull run in real estate.” Yet this led to the creation of Forum.
An early key institutional backer was key to the growth of the firm. Platt turned to a former business school buddy who had risen through the ranks at TIAA-CREF (Teachers Insurance and Annuity Association, College Retirement Equities Fund). He explains that Forum got “lucky” because TIAA-CREF thought the idea of investing in hybrid securities of international real estate companies would be a great compliment to their existing exposure to US REITs. “They got us off the ground. I have to thank them for having that vision because that was not an obvious bet back in 2002. Our initial foray was into Europe and we did the same thing in Asia. With the benefit of track record, we went on to raise our first multi investor funds. Without their clairvoyance we wouldn’t be around. We had no such grand design. Frankly, we found with TIAA-CREF and others that oftentimes our best ideas came from investors and clients.”
We were in the middle of the dotcom bust and it was not obvious that we would have a bull run in real estate.
‘How do we help?’
Like a private equity firm, Forum uses structured debt and equity as a means of investing in companies as opposed to projects. It doesn’t use much leverage. What it tries to do is provide growth capital to “allow a company to break out of the status quo”. The exit point is often via an IPO. Securities are in the DNA of the firm.
Among the earliest investments for its first fund were stakes in two French property companies, Affine and EMGP, a Belgium company called Cofinimmo and Swiss group, Züblin. The realised internal rates of return bring to mind private equity (when it works right).
Since that first fund, Forum has added two more in Europe, and two in Asia. With the addition of the global real estate securities platform, it has also grown to 70 staff, opened eight offices in Europe, Asia and North America, and has portfolio investments in 21 countries.
Which brings us to Citi’s securities platform. Its appeal is that while Forum was making investments in property companies, it did not have a global real estate securities franchise like Platt used to run for Morgan Stanley.
“Securities are in the DNA of the firm,” says Platt, “but as we grew, we felt over the years in some ways we were getting away from our roots and in danger of losing touch with the public markets, which is really integral to our business. We looked at the price for talent on Wall Street and the idea of starting a business from scratch. Building up to a five or 10-year track record looked to be insurmountable for our firm. Then along came the credit crisis.”
What originally looked impossible suddenly was within the grasp of Forum. All the large houses with global real estate securities funds had taken a look at buying Citi’s business. However given the free-fall of property shares around the world, none seemed prepared to take the risk of acquiring it earlier this year.
Platt had followed the Citi opportunity from a distance but believed an agreement with another suitor was well advanced. Hearing that this deal might be falling apart, Platt jumped when he heard Dan Pine, head of Citi’s global real estate securities, was in town and available to meet. Pine and Platt had known each other as competitors during Platt’s Morgan Stanley days and the two came quickly to an understanding of the business synergies between the two firms. Forty-five days after that initial contact, Forum Partners acquired Citi’s securities platform and Pine and his team are now in Greenwich, Connecticut working for Forum.
Forum now can tell prospective clients it has researchers looking through all the real estate securities in the world. It has views on the relative value of around 500 REITs and other listed companies in Europe, North America, and increasingly emerging markets in Africa, Latin America and the Middle East, says Platt.
Securities are in the DNA of the firm.
Through the storm
Forum began to see REIT securities trading less buoyantly in the second half of 2006. Then by May 2007 there was a “violent” move to the downside, and Forum started selling listed shares out its portfolios. What are we going to do to position our business for the next stage? Part of the answer was to opportunistically purchase Citi’s global securities business.
At the same time, the firm was sitting down with the chief executives of its portfolio companies to ask what could be done to preserve capital. It suggested companies refrained from bidding aggressively any more on new acquisitions.
“Our message was not always warmly received,” says Platt. After all, in Asia where Forum has investments, things were still roaring along. “Nobody wanted to talk about a downturn, but by January and February 2008 it was very clear that the downturn had spread. It was global. Our pace of acquisitions slowed.”
Forum uses tools such as deal vetos or rights over limiting indebtedness to influence the strategies of portfolio companies.
That said, it wasn’t easy being in defensive mode. “We didn’t have a crystal ball here and we are occupying one board seat out of many and so we were trying to build consensus among investors and management. That carried through most of 2007, 2008 and into the beginning of 2009. While the prospects for real estate looked challenging as the new year began, the rapid recovery in the capital markets, particular in Asia, suddenly allowed some companies that had been rather pressed for liquidity to begin refinancing their balance sheet or once again sell assets and recycle cash. As a consequence, by the second quarter, the number of investee companies in “intensive care” had dwindled.
The upturn “created a backdrop for us to peer over the edge of the fox hole and ask: ‘What are we going to do to position our business for the next stage?’ Part of the answer was to opportunistically purchase Citi’s global securities business,” says Platt.
Forum is also seeing growing potential for more significant fundraising, as it now routinely sees increasing demand from companies for more capital than the firm’s typical investments of €25 milion to €50 million.
The demand for larger investment sizes is seen clearly in Japan, where it is investing ¥11.0 billion (€80 million; $120 million) on behalf of Forum Asian Realty Income II in Australian-listed Galileo Japan Trust’s
Away from Asia, Forum has been looking for ways to profit from the banking crisis and the rapid build up of problem real estate loans on the books of financial institutions. Beginning in 2008, through its third European fund, Forum established a strategic relationship with a UK loan servicing specialist known as Crown Westfalen. Crown manages NPLs for banks or opportunistic buyers, and last year it structured a facility for Crown to invest side-by-side with buyers of NPLs. Since the facility was made available, Forum has purchased, in part, four pools of loans in the UK. This play could be expanded beyond the UK. Platt reveals how it has been in consultation with a number of European governments about how special servicers might be used in those countries
Building on this experience, Forum accelerated plans to invest in distressed debt in the US earlier this year. It acquired a 50 percent stake in American Mortgage Capital Group. Based in Chicago, American Mortgage was established in 2007 to focus on buying pools of distressed residential whole loans.
In addition to capital, Forum has been loading up on human capital. In a key London hiring, the firm has brought on board real estate investment banker Richard Cotton from JP Morgan Cazenove. Over the next year, Forum will hire people in Japan, China, India and elsewhere.
In short, you will be hearing much more about Forum in the future. Platt, who knows well what both failure and success look like, is proud of what he has built so far and optimistic for the future. He says: “We are quite a small company compared to our peers, but we have been able to punch above our weight.”
What are we going to do to position our business for the next stage? Part of the answer was to opportunistically purchase Citi’s global securities business.