INTERVIEW: The new, new guard

The past nine months have been full of change and more change for JE Robert Companies.

From the departure of chief operating officer Michael Pralle and European head Malcolm Le May to founder Joseph Robert’s diagnosis for brain tumours, 2009 has been a year of upheaval for the firm. And make no mistake, the McLean, Virginia-based firm will continue to change, says its new CEO, Barden Gale, who joined recently from his post as vice chairman for real estate of Starwood Capital.

Just days after founder Joseph Robert announced he was stepping aside from the day-to-day running of the company he founded in 1981, Gale told PERE the “critical message” the firm wanted to send out was its recognition of the “need to react and adapt” to the changing real estate environment. The ability to change to LPs desires will be a fundamental part of JER’s focus going forward, he explained. “We are undergoing radical changes in the real estate markets, whether it’s underlying fundamentals or the capital markets. The rules are being changed as we speak and no one knows exactly where it’s all going to come out,” he said. “The challenge for all managers, and JER, is how we adapt to this new environment.”

JER’s  story is no different from most private equity real estate firms in the wake of the credit crisis. Any fund sponsors worth their salt should freely admit their focus has alteredin the past two years. The meltdown in property valuations globally has left many strategies, at best, diminished and, at worst, irrelevant. When JE Robert Companies hired Michael Pralle in October 2007, the former GE Real Estate executive said he wanted to grow the McLean, Virginia-based shop into a global brand and a “capital-raising machine” similar to Tishman Speyer and The Carlyle Group. As part of that strategy, Pralle significantly increased JER’s exposure to emerging markets, especially in Latin America. As everyone knows only too well though, the name of the game in 2007 is different in 2009.

That’s certainly the case at JER. PERENews.com exclusively revealed last month the firm was planning to close its Latin America fund, along with its offices in Mexico and Brazil, owing to the economic crisis. In addition, the firm has been rocked by the departure of senior personnel, including Pralle, who left JER for personal and family reasons in March, and European head Malcolm Le May, who resigned in February. Alex Gilbert, head of JER’s US funds business, also resigned in May, PERE has learned.

Assessing the changes needed, Joseph Robert announced at the end of the June that he would hand over the dayto- day running of his entire real estate investment firm to Gale. Robert told PERE at the time that the need for regular hospital treatments was a “distraction” the firm could do without. “After  28 years, it’s time for new leadership,” he said. Robert is now executive chairman of the firm.

For Gale, the private equity real estate industry of 2009  will be one that demands a fund manager able and willing to adapt to the changing wishes of its investors. “We are going into a new era of risk aversion by investors,” he said. “We can no longer spin these macro-economic themes that weave webs of gold at the end of the rainbow. The era we are entering will be about identifying deep value, where managers work harder and smarter than before.”
 
Investors, he added, would be telling their GPs: “Show me, don’t tell me.” As a result, Gale said JER’s immediate priority would be to focus on existing assets rather than new acquisitions. “People looking for higher risk-adjusted returns are being paid to wait today. I don’t believe JER will really be missing anything [by adopting that strategy].” Like most firms, JER ramped up its asset management activities last year, and more aggressively during the first half of this year. Gale said it was time to push harder: “I have told this team and other people that this is when you learn the business, right now. Asset managing in today’s environment takes a higher degree of experience and skill than any acquisition done over last five years.”

Gale dismissed suggestions that such a focus would distract the firm from positioning itself for future deals. “No it won’t,” he said. “When you work on  an acquisition you work unbelievably hard and you don’t even know if you’re going to close. I believe managing your assets is every bit as exciting, perhaps a little fraught, but every bit as exciting and more intellectually challenging than doing acquisitions.”

He also rejected assertions that JER was “missing the boat” in terms of new opportunities. “We are learning so much as a company,” he said. The firm was scouring the market for current deals to see how the deal “was done, what the implied pricing was, what the structure was” in order to understand “what that means for our portfolio and our strategy.” Gale said: “We are doing everything but sign contracts in order to be better managers of our portfolio.”

Barden Gale

And when JER does again start actively participating in the deal market, its attention will be less on emerging markets and increasingly concentrated on mature countries, possibly including a return to its roots of distressed debt investing. The shifting focus has already made an impact on the firm. As noted above, JER is currently working with investors as it winds down its JER Partners' Latin America Fund and closes its offices in Mexico City and Sao Paolo.

PERE has learned that part of the decision was fuelled by the withdrawal of an unspecified major investor. In September last year, the California Public Employees’ Retirement System recommended allocating $500 million to JER Partners' Latin America Fund I. A CalPERS spokeswoman said the pension does not comment on their partners’ operations. JER does not comment regarding funds, investors or potential investors.

Doubts have also been raised about the future of JER’s REIT, JER Investors Trust, after it delisted from the New York Stock Exchange. The firm revealed that JER Investors Trust president Mark Weiss left the firm in mid-July. JER is also believed to have put on hold its $1.5 billion opportunistic fund, JER Fund V, in the wake of the credit crisis. Gale said the firm had the “right people in the right roles for the job at hand”.

But he admitted his focus would be on the “mature markets and on our established US and European platforms”, and that the international operations of the company would alter according to global market conditions. In six months, he said, JER could have changed as “circumstances and market opportunities change. We will be constantly evolving the firm as the landscape changes.” In choosing Gale, Robert opted for a man after his own heart.

Gale said his interview process focused equally on his personal values as it did his real estate business acumen,not least the pair’s charitable work. Like Robert, Gale said the success of any manager was all about the success of the team. And that team would still “very much” involve Robert, Gale said.

As executive chairman, Robert said in June he would be on hand to support Gale and the senior management team in “any way they see fit”. Gale said he couldn’t have asked for a better partner than the real estate veteran.“The last thing I want is for both of us to get overly politic in these newly established roles. I really do welcome Joe’s involvement and I will seek out his sage advice on strategy, relationships and insight.

The job of filling Joe’s shoes is keeping him in those shoes in the first place.”