BLUEPRINT INTERVIEW: The relentless searcher


You can't help but like Gary Garrabrant. The chief executive officer of Equity International is a man full of personality. He calls himself “relentless”. As we sit down for an interview in a suite at New York's Carlyle Hotel, Garrabrant immediately cracks a joke to put everyone at ease. Asked to describe his life growing up, he says, “Well, following my release, I decided to take a different tack …” His laughter is infectious. Our photographer is working overtime.

There is no false formality to Garrabrant. Even when we ask him to pose in front of the Carlyle's famous Bemelmans Bar piano, Garrabrant is happy to oblige. Leaning forward on the black lacquered surface of the grand piano, he remarks that the previous night the bar was closed for a wake. “Now's that the way to be remembered,” he says.

As Garrabrant describes his childhood – he grew up in Chicago, the son of a manufacturing specialist and IBM secretary, where most people he knew were educated via the “college of hard knocks” – you begin to see why he labels himself relentless.

While studying finance at the University of Notre Dame in the late 1970s, the young Garrabrant took a real estate investment class and became hooked on the subject. “I loved the class, and the whole idea of being involved in this industry. I realised you could never really learn it all and that was an idea I was really taken with.”

In response, Garrabrant managed to commandeer through a friend's father a directory of Mortgage Bankers Association members. In all he sent out 96 resumes to MBA members in the cities where he wanted to work, including New York, Boston, Chicago, Los Angeles and San Francisco. Every letter was unsolicited and in the end, Garrabrant obtained 94 formal rejection letters.

Of course in this instance Garrabrant's relentless nature was motivated by another factor as well: the bartender at one of Notre Dame's main bars offered free drinks to students who received formal, signed rejection letters. So although the rejection didn't faze him, he made sure to get as many letters on headed notepaper signed by an officer of the company as possible.

His collection grew so big that Garrabrant had to get a briefcase to hold them all in. “I would put this briefcase up on the bar and I would click it open and the bartender would say, ‘Oh no, not you again.’ I'd say to friends, ‘So what should it be tonight? Boston, Miami, San Francisco?’, pull my rejection letters out and there would be a round of drinks for each letter.”

Garrabrant though did get two invitations to come in for an interview, including one from the First National Bank of Chicago where he worked for two years, prior to moving to New York to work with Chemical Bank.

The early bird catches the worm
It is such relentlessness that still drives Garrabrant almost four decades later as chief executive officer of Equity International. He is insistent on being an early player into every market in which Equity International invests. Indeed, once competitors start to move in, the attractiveness of the strategy seems to lose favour for Garrabrant and his team. In 1993, he set up a real estate hedge fund with former colleague Michael Berman and backed by Equity Group's Sam Zell, whom Garrabrant first met in 1981 while working for Chemical Bank. Genesis Realty Capital Management was one of a handful of investment managers dedicated to real estate, acquiring long and short positions of publicly traded real estate companies.

“There wasn't a sea of sophisticated intelligence about the publicly traded real estate world at that time,” says Garrabrant. Within two years though, the competition had increased significantly. “We both looked around and saw that the business was going to change dramatically. Neither of us were really that excited about competing in an overpopulated space.”

At Equity International the same philosophy prevails. “It's very appealing for us to be early. Be intrepid, be early and have the courage of your convictions to develop a view that gives you the confidence to say, yes, you love a certain country,” stresses Garrabrant. For Equity International that affection has been directed in particular to Mexico and Brazil.

Together Garrabrant and Zell started looking at Mexico in earnest in 1997, before they had officially created Equity International, but in preparation for the firm's first fund, Equity International Fund I, which closed on $370 million in August 1999. Critics, Garrabrant says, would accuse them of choosing Mexico because of its proximity to the US and the fact that Equity International had no plans to open offices in any of the countries it invested. “But that was not the case. We travelled the world,” he says.

In fact, Garrabrant and Zell travelled as far as Baku, Azerbaijan, in search of possible investments, eventually making three office investments in Kiev, Warsaw and Buenos Aires before coming back to Mexico. “That's when we really understood the allure of the emerging markets,” he says. “When we started looking at Mexico in earnest it became clear to us there was this wonderful opportunity to have a broad presence in a high-growth, youthful country which was on its way to joining the investment grade world.”

By mid-1999, Garrabrant had persuaded Zell of the merits of evolving the concept of Equity International into investing in real estate-related companies rather than simply being an international mirror of Zell's Equity Office Properties. “Operating platforms are boundless,” Garrabrant explains, “buildings are confined.”

In Mexico though, Garrabrant saw lots of opportunities for investment. “Mexico had a number of real estate-related businesses that were a clear way to capitalise on the growth of the middle class, retail properties, homebuilding, warehousing and logistics,” he adds. “And we met all the homebuilders, all the guys who did industrial, everyone who did retail properties. I'm sorry we didn't tape some of those conversations because there were some very colourful characters. But we realised how special an opportunity this was, how special an opportunity Mexico was.”

One of Equity International's most noted investments was with the Mexican homebuilder Homex. Last April, the firm sold its remaining Fund I stake in the residential developer, six years after first investing in the company and four years after leading its listing on the New York and Mexican Stock Exchanges. Equity International invested just $32 million in Homex, which builds affordable and middle-income housing in 30 Mexican cities, in 2002. The private equity real estate firm exited the deal last year, generating more than $500 million, according to Garrabrant.

Equity International Fund I, which made a majority of its investments in Mexico, made gross returns of $991 million, annual returns of 24.4 percent and a multiple of 3.1x on invested capital. As part of Fund I's investments, Equity International also created two companies with Denver-based private equity real estate firm Black Creek Group and more recently, through Fund IV, invested in Homex at roughly one-third the share price achieved in the 2008 sale.

Professional opportunists

As Garrabrant talks about Equity International's strategy for 2009 and beyond, he dismisses suggestions the firm is Latin America-centric. “We are agnostic, we don't have a Latin theme. We have just seen such great opportunities in the region,” he stresses. “We travelled so early, so often and kept up that pace that we are always seeking the greatest opportunities without regard to geography.” Garrabrant stresses that scalability and first-class operating partners are Equity International's priorities.

Subscribing to an “artificial diversification model”, Garrabrant counteracts, is “hieroglyphics. You cannot say to investors ‘We're going to be 12 percent Japan, 19 percent China et cetera.’ and say you're opportunistic. It's a corruption of the word. You have to allow opportunities to drive your investment activity, not the geography. We are professional opportunists.”

This is part of the reason why Equity International has purposefully kept its funds small. Garrabrant concedes, the timing of Fund I was both “terrible and fortuitous”, coinciding with the Asian contagion, the Russian sovereign debt default and the meltdown of Long Term Capital Management. “At one point we were thinking we might be able to raise $1 billion to $2 billion no problem. In the end we ended up with less than $400 million of equity.”

Garrabrant says the fund size turned out “ideally” being more appropriately scaled to the opportunities outside the US. “Having an immense amount of capital would have forced us to invest in much larger, more competitive companies, where we wouldn't have had as much influence as we have had,” Garrabrant says.

It's also the reason why Garrabrant and his team is still focused on Brazil. “We are not adverse to concentration. We love Brazil and we will continue to pursue opportunities in Brazil.” Equity International currently has five portfolio companies targeting real estate in Brazil, and Garrabrant says he wants to grow that number to seven or eight. Some of those companies though may not currently exist. “We may have to start one or two,” he adds, just like Bracor, which Equity International created in 2006 with Carlos Betancourt, Banco Itaú and Capital Trust, the latter of which has since exited its position.

China and beyond
Garrabrant is also keen to expand Equity International's presence in China. The firm has already invested in Xinyuan Real Estate, a Beijing-based homebuilder focusing on middle-income buyers in China's second-tier cities, Shanghai Jingrui Properties, which targets middle-income and upper-middle income homebuyers in Shanghai and the Yangtze River Delta, and Shanghai Yupei Group, a warehousing and logistics real estate company based in Shanghai. “China is more complicated than Brazil or Mexico, but the urbanisation trend is very powerful indeed there,” says Garrabrant. Add to that the shift by some investors for more distressed opportunities in developed markets, and Garrabrant believes the picture for China is getting brighter. “The competition is lessening in China and that's something we always like.”

In terms of other emerging – and in some cases frontier – markets, the chief executive officer says there are plenty of interesting opportunities. The firm is researching opportunities in Vietnam and in 2007 Equity International made its first investment in Egypt through the formation of an affordable homebuilding company with Orascom Hotels and Development, Blue Ridge Capital and Homex. The firm sees additional opportunities in the region, including Saudi Arabia and other Persian countries, where the Equity International team has made numerous visits. Saudi Arabia's multinational company, The Olayan Group, also became a significant partner to Equity International in 2008.

Garrabrant says he has spent considerable time looking at Russia and India but has yet to find the right partner. When it comes to sub-Saharan Africa, he says the firm is in “learning mode” as it talks with several corporate private equity firms about the opportunities in the region.

And developed markets such as the US and Western Europe? Asked whether the private equity real estate industry will see Equity International target distressed opportunities in the US, Garrabrant says “no” without hesitation. Although the firm's chairman Sam Zell is personally contemplating corporate distressed debt investments, for Equity International, emerging markets are the way forward. “Frankly from our first fund forward we've consistently had high enthusiasm for emerging markets,” Garrabrant adds. “Part of that is because we've had world-class partners and invested in terrific companies, but it also comes from being early and having courage. I don't think there is any comparison between emerging markets and developed markets in terms of the growth potential for real estate-related businesses.”

What the next year will demand, irrespective of strategy Garrabrant says, is patience and discipline. “It will be about not acting too quickly. It's ironic, but for the past decade there was this huge party going on next door to us. We heard it and sometimes guests would wander into our room as well. We were having fun as well, but we just weren't as loud. A new era is dawning now where the party won't be so loud. Equity International is well-suited for that; it's very much our culture.”

Gary Garrabrant

1999 Founded Equity International With Sam Zell. Garrabrant Is Chief Executive Officer
1996 Joined Sam Zell'S Equity Group, Overseeing The Capital Markets Group. Garrabrant Also Helped With The
Conversion Of The Four Zell/Merrill Real Estate Opportunity Funds, Created By Sam Zell And Merrill Lynch, Into
The Real Estate Investment Trust, Equity Office Properties
1993 Co-Founded Genesis Realty Capital Management, New York, An Institutional Investment Manager And
Hedge Fund Focused On Public Real Estate Companies
1989 Worked For Bankers Trust, Real Estate And Corporate Investment Banking, New York
1981 Joined Chemical Bank Real Estate Group In New York And Helped Create The Bank'S Real Estate Investment
Banking Operation, Chemical Realty. Garrabrant Frst Met Sam Zell While Working For Chemical Bank In 1981
1979 Worked For First National Bank Of Chicago In Its Real Estate Division
1979 Graduated From University Of Notre Dame, With A Bba, Fnance Concentration