Scott O’Donnell is not a fan of large, bureaucratic organisations. This wasn’t for lack of trying – he has certainly logged long hours in such firms. In his real estate career, he has worked at Bankers Trust – the company which merged with Deutsche Bank – and Donaldson, Lufkin & Jenrette – which in turn merged with Credit Suisse. Both mergers took place during his tenure at the firms.
That’s why the corporate complexities that accompanied these mergers, he says, were not his cup of tea. Instead, O’Donnell is far happier in his current role at Alabama-based Harbert Management Corporation, where, as European head of real estate, he oversees mid-sized funds and an entrepreneurial team at a firm that remains private, and of which he is a shareholder.
Bureaucracy, control and discipline are subjects close to O’Donnell’s heart. He believes that it is possible for an organisation to be “disciplined” and institutional without undue bureaucracy. However, O’Donnell strongly believes, the larger an organisation becomes, the more difficult it is to manage properly.
Discipline is a word Harbert likes to use. Indeed, it is the word emblazoned on the cover of the firm’s 2008 annual report, and perhaps helps explain how it has managed to survive the downturn as an alternative asset investment management firm with funds dedicated to mezzanine debt, hedge funds, private equity and energy, in addition to property.
“I think investors would use disciplined as one of the words to describe us,” says O’Donnell. “We are also cautious but entrepreneurial and knowledgeable,” he adds. Discipline is also a phrase rival investors have used to describe O’Donnell personally. One person tells PERE O’Donnell is regarded as someone who didn’t allow the deal frenzy of 2007 to pressure his investment pace or style. He is also known for being thorough in underwriting, and for being creative and flexible in making off-market deals.
O’Donnell’s version of discipline isn’t the kind of thing you learn in school. He is one of the few real estate professionals at a major firm to have made it close to the top without a business degree. He graduated with a BA in accountancy from the George Washington University in 1986 and worked for the forerunner to KPMG in the US, advising real estate clients. At the tender age of 26, he found himself chosen to be the chief financial officer of a Washington DC developer – just as the real estate market was peaking in 1988.
‘Not so fun’
It proved to be the making of his property career. “What started out as being fun quickly became not so fun,” he remarks. But the experience proved to be the most valuable of his career.
The teacher’s son had suddenly found himself spending a lot of time dealing with lenders from Tokyo, Europe, the Middle East and all over the US. “As a 26-year-old kid I had all these lenders really unhappy. I spent 1989 to 1991 restructuring the company’s debt portfolio a number of times. I learned more in those three years about investment and discipline than I learned in the rest of my entire career. Those years were especially difficult, but they mean I will not look through rose tinted glasses just to get a deal done. I’ve been to the other side and it can be quite dark and lonely.”
|  What started out as being fun quickly became not so fun.
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By 1991, O’Donnell’s workouts were not over. Ken Leventhal recruited O’Donnell to travel around the US restructuring other investors’ debt portfolios. Then the RTC came along, and he started advising on the sale of loan portfolios and authoring the valuation methodology for commercial real estate and multi-family projects financed with tax exempt bonds. Bankers Trust, the US firm, spotted him and hired O’Donnell to buy such assets. Moving to Europe in 1997, O’Donnell helped establish a European real estate principal transactions platform for Bankers Trust. | As a 26-year-old kid I had all these lenders really unhappy. I spent 1989 to 1991 restructuring the company’s debt portfolio a number of times. I learned more in those three years about investment and discipline than I learned in the rest of my entire career. Those years were especially difficult, but they mean I will not look through rose tinted glasses just to get a deal done. I’ve been to the other side and it can be quite dark and lonely. |
His first transaction was in Poland and involved a $20 million investment in Globe Trade Center, or GTC, in the form of convertible debt and equity, to fund their development pipeline. Today, GTC is one of the largest and most successful real estate companies in central Europe.
Senior real estate professionals tend to have colourful stories involving other senior real estate professionals, such is the small nature of the industry. In answering a question about how he came to be at Harbert, O’Donnell explains that The Blackstone Group’s president, Hamilton “Tony” James had a lot to do with it.
To summarise: In 2000, O’Donnell was recruited to lead DLJ Real Estate Capital Partners’ business in Europe by what at the time was a private equity hothouse of talent, DLJ Merchant Banking Partners. However, things did not go according to plan. In the first week of starting, DLJ – where Tony James was a senior executive and responsible for the firm’s private equity businesses – announced it was merging with Credit Suisse, a company O’Donnell says he would not have joined at the time.
News of the merger came as a shock to him. “About three weeks before I started, the only remaining question I had was, ‘How long is DLJ going to remain independent’? I really didn’t have any interest in going through a large merger or being part of a large organisation where the entrepreneurial aspect of DLJ would be lost. The answer from the top was that there was nothing in the works or planned (merger or otherwise) that would jeopardise the firm’s culture. To put it mildly, it was a great disappointment.”
O’Donnell found out about the merger following a trip to Berlin. Touching down in London, a friend asked how he liked his “new, new employer”. The first call he made was to David Weil in New York, who ran DLJ Real Estate Capital Partners. Weil, it turned out, knew little more than O’Donnell about the takeover.
This was around the dotcom crash, and at the time, DLJ Real Estate Capital Partners was managing a $1.2 billion fund with five people in Europe. From a corporate standpoint, things were difficult post-merger. There were turf wars to sort out and the firm issued a freeze on hiring. “It got to the point where it was so bad that I had to pay for a parking space at Canary Wharf for the team’s secretary out of my own pocket. That is when I felt enough was enough,” he recalls.
Stuck at a huge organisation in cost preservation mode, O’Donnell was not enjoying himself. In addition, he did not enjoy the way deals were getting done. According to O’Donnell, at the time of the merger, the same large real estate funds were competing for the big ticket deals. “If there were four of us, it seemed like the guy that hadn’t won the last three would win the next one.”
New home, Alabama
Looking for his next move, O’Donnell mentioned an idea of starting his own fund to Raymond Harbert, the president and chief executive of Harbert Management Corporation. The pair had once worked on a deal together in Europe in 1988 when O’Donnell was running the acquisition of five Swedish real estate companies from the national telecoms company, Telia, which was preparing for privatisation.
That initial contact with Harbert suggested O’Donnell shared something in common – that to get a deal done you have to put skin in the game. The Swedish deal involved buying 300 properties in Sweden. It required $120 million in equity. Bankers Trust and Deutsche Bank, which had not yet merged, were the lead investors. There were two other investors, one of which called him one Sunday to say it could not come up with the required equity.
“It was a very short conversation,” he recalls. The chairman went away and the next day Raymond Harbert called O’Donnell to introduce Harbert as a relatively young asset management company that had an interest in the firm unable to come up with the money. “He explained that he would have done exactly the same as me in demanding the equity stake.”
Harbert suggested the opportunity may be well suited for his family’s interests and so in the summer of 1998, O’Donnell, Raymond Harbert and other Harbert real estate professionals, travelled all around Sweden together in the back of a van assessing the properties. “In the end, the Harbert family put in about $17 million, not $5 million – he liked it that much,” says O’Donnell.
This deal was the start of his relationship with Harbert, but it would be four years until he joined the organisation.
Harbert’s reasoning for investing in European real estate was partly to diversify away from US alternative assets. Certainly, Europe was easier foreign territory than, say, Asia or South America, so following O’Donnell’s decision to leave DLJ/Credit Suisse, he had dinner with Harbert in New York, after which he joined the firm. Seven and a half years later, he is still at Harbert and the firm remains privately owned. All the shareholders are employees, O’Donnell included.
Eclectic history
To understand Harbert Management Corporation today, it is necessary to know something of the history of the firm. The first thing to note is that the predecessor, Harbert Corporation, was started as a civil engineering and construction firm in the 1940s by John Harbert, an Alabama entrepreneur.
John Harbert set about growing the business from being a one-man band with the proverbial pickup truck and a shovel to becoming a multi-national privately owned conglomerate doing very large infrastructure projects. He expanded into different investments, including coal reserves. The 1970s oil boom gave John Harbert cash to continue to grow. In the 1980s, Raymond Harbert joined the family business and started out in Harbert Properties Group. When he eventually took over running the company, he decided to break it up, leaving it with just a few core disciplines.
In the aftermath of the sell-off from 1990 to 1993, Raymond Harbert decided to start his own business, styled after the old English merchant banks that would manage alternative investment funds in which his family’s interests as well as third party capital could invest.
Harbert sponsored its first fund, a US real estate opportunity vehicle (see p. 26) in 1995. The group expanded from there to raise hedge funds, power funds, private equity, second stage venture capital, mezzanine debt and an Australian private equity fund.
O’Donnell joined Harbert in 2002 as co-head of its European real estate team alongside Douglas Kirkman, now a senior dealmaker at The Blackstone Group. In 2003, the firm raised its first vehicle, Harbert European Real Estate Fund. The $53 million raised was primarily Harbert’s own money. The first deal the fund did was buy an office in Paris in October 2002. It was one of 13 assets the fund acquired. To date, nine assets have been sold delivering 2x returns and an IRR of around 42 percent. | Being disciplined is not the easiest thing, but one can only imagine how much those [pre-committed 2007] deals are worth today if they ever got done. |
The vehicle was successful enough to allow a follow-on fund, which was opened up to third party institutional investors. Harbert European Real Estate Fund II raised around $315 million in March 2007 and to date is 75 percent invested. The firm took on additional staff for Fund II (see p. 26), including Tor Tveitane formerly of Curzon Global Partners and Peter Land formerly of Lehman Brothers.
Thinking back to that second fundraise, O’Donnell admits Harbert was in a difficult position. 2006 and 2007 were the years of the outsized funds. Prospective investors in the Harbert fundraising trail often had recently met with firms targeting much larger funds that were largely pre-committed to transactions. Then Harbert would walk through the door saying it was looking for $300 million with little pre-specified.
“It was brutal in some of those meetings, I can tell you,” says O’Donnell. “Being disciplined is not the easiest thing, but one can only imagine how much those [pre-committed 2007] deals are worth today if they ever got done.”
Like the “best real estate guys”, Harbert didn’t do a lot of investing in Europe in 2007 and 2008, the years many got burned. Instead, it spent a great deal of time on asset management. That is not to say that Harbert as a corporation was immune to what was going on around it. According to the corporation’s 2008 annual report, it made “modest” losses in its US and European real estate funds, as well as suffering losses in some of its other alternative asset strategies.
O’Donnell says: “All things considered I am very pleased with the position of our portfolio, but at the same time I wouldn’t say every investment is going to turn out exactly as expected. When we saw the market get worse we really dug our heels in.”
Now, however, Harbert is investing again in Europe. In August, Harbert acquired four industrial properties from UK REIT, Segro, for £103 million (€72 million; $167 million). Harbert persuaded Abbey National, a bank owned by Spain’s Santander, and a building society, Nationwide, to club together. | 2009 was probably the best year for us ever from an investment perspective. |
The business plan for the four assets is to lease vacant space, modify existing space to be better suited to tenant demand and take advantage of expansion rights on land that has the benefit of planning consent.
Another deal last year involved distribution facilities from ProLogis. The leases have on average more than 12 years left on them. In Continental Europe, Harbert has also been buying. It acquired 11 modern office buildings in Lyon, France. While O’Donnell is in charge in Europe, the firm is certainly not about to change its spots by suddenly employing 50 dealmakers and raising €1 billion for its next fund. “We are not looking for massive scale, we are looking for appropriate risk-adjusted – with an emphasis on risk-adjusted – returns,” he says, adding: “2009 was probably the best year for us ever from an investment perspective.”
Eyeing UK and France, O’Donnell says the two countries office markets are of particular interest to Harbert. He adds the company is also becoming more interested in Poland, where he spent a year working on a deal for Bankers Trust in the 1990s.
“We are going to continue doing what we what have been doing on a limited larger scale, managing funds of €500 million to €700 million. I think you can get carried away with size, and I think we have seen people get carried away. You lose your discipline.” For O’Donnell, that would be the worst thing one could do.
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