As spin-offs go, this one can expect to be one of the most notable of the current downturn: Sonny Kalsi, John Carrafiell and Fred Schmidt are teaming up to create their own merchant banking real estate platform. Kalsi, Carrafiell and Schmidt’s new venture is
PERE can reveal the former Morgan Stanley Real Estate Investing professionals are creating a boutique real estate merchant banking platform that will act as a principal investor and advisory firm based in London, New York and Tokyo, according to a number of market sources.
The trio is believed to be in the process of finalising the venture’s structure, with their plan expected to be completed over the coming months. Market sources have told PERE though that over the next several years the group hopes to raise capital targeting distressed Japanese real estate, continue the workout advisory work already started by Carrafiell and focus on select US and Western European opportunities.
The news follows months of speculation about the future of Sonny Kalsi, former global head of Morgan Stanley Real Estate Investing, and Fred Schmidt, former head of Asia MSREI, in particular, after both left Morgan Stanley in 2009 and 2010, respectively. Kalsi ceased day-to-day work for the firm in February last year, resigning in October, and since then has been talking with peers and industry participants about his future. Schmidt departed Morgan Stanley this February. By joining with Carrafiell and Schmidt, Kalsi is teaming up with two of the industry’s most experienced property professionals.
targeting opportunities in Japan, particularly
opportunities involving non-performing loans,
CMBS restructurings and recapitalisations.
Land of the rising sun
Kalsi, Carrafiell and Schmidt’s new venture is
The initial target on the trio’s radar is expected to be Japan – a region which Kalsi and Schmidt have a particular affinity for. Both have spent years working in the region, which Kalsi oversaw from 1998 until 2006. With roughly 40 percent of Morgan Stanley Real Estate Investing’s business in the region by 2006, Asia was an increasingly important investment strategy for the bank. Kalsi, Carrafiell and Schmidt’s new venture is targeting opportunities in Japan, particularly opportunities involving non-performing loans, CMBS restructurings and recapitalisations. Kalsi, Carrafiell and Schmidt
In Europe, Carrafiell, who built and led Morgan Stanley’s European advisory and principal platforms from 1995 to 2005, is expected to focus primarily on advisory work – with principal opportunities expected in the near future. Stepping down as joint global head of Morgan Stanley’s real estate group in December 2008, Carrafiell set up his own advisory firm, Alpha Real Estate Advisors, and acted as a senior advisor to the bank he had been with for 21 years.
Among the restructuring deals he worked on was the recapitalisation of Songbird Estates, the owner of Canary Wharf Group. In that deal, Carrafiell structured and led the recapitalisation, bringing in the Chinese sovereign wealth fund, the China Investment Corporation, alongside Songbird’s largest stakeholder Qatar Holding (the investment arm of the Qatar Investment Authority). The recapitalisation raised £1 billion of equity, equivalent to €1.1 billion; $1.52 billion today and making it the largest-ever equity capital raise in Europe, and resulted in the discounted purchase of a maturing £880 million Citigroup loan. The deal helped Songbird avoid a potential covenant breach, saving the company. In the five months following the deal, shares in Songbird increased more than 70 percent.
The US is expected initially to be a lower priority for Kalsi, Carrafiell and Schmidt – all of whom hail from the country. With relatively less deal flow, whether distressed or not, and large sums of capital already sitting on the sidelines waiting to deploy, the US isn’t expected to yield tremendous opportunities for a couple of years. However, once activity starts to pick up the trio is expected to consider targeting distressed opportunities in the country.
Kalsi, Carrafiell and Schmidt
The road so far has not been without challenge. Kalsi was placed on administrative leave from Morgan Stanley in February 2009 after it emerged “actions” by a former employee in China appeared to have violated the US Foreign Corrupt Practices Act. A nine-month investigation by Morgan Stanley – the findings of which were turned over to the US Department of Justice and Securities and Exchange Commission – ultimately found “no evidence that Sonny caused or authorised the alleged misuse of assets”, Kalsi’s spokeswoman said at the time. Sonny Kalsi takes responsibility for it and doesn’t blame anyone else, not Morgan Stanley and not the market. No-one saw a second or third deviation event market correction happening, and almost everyone got it wrong. You cannot change that.
The road ahead though may also be bumpy. Questions have been raised about the recent performance of Morgan Stanley Real Estate, with one institutional investor questioning to PERE Kalsi and Carrafiell’s ability to start afresh, considering the write-downs that were suffered by MSREF funds under their watch as joint global heads together, reporting to Jay Mantz. According to a semi-annual performance report from the California State Teachers’ Retirement System, the 2007 fund MSREF VI returned -92.9 percent IRRs to the end of March 2009, while the 2006 fund MSREF V US Domestic returned -100 percent to the same date.
What Kalsi would be judged on, the person added, was how he dealt with the performance issues of the business. Indeed, Kalsi was rumoured to have been approached by Kohlberg, Kravis & Roberts as they sought a veteran to lead their debut into real estate investing.
That approach came to a head in the fall of 2008, according to the professional, who added that Kalsi declined the offer because he “wouldn’t leave at the bottom”.
Having now left Morgan Stanley, Kalsi – together with Carrafiell and Schmidt – is hoping to take advantage of global real estate markets at the bottom of their cycle.
Sonny Kalsi takes responsibility for it and doesn’t blame anyone else, not Morgan Stanley and not the market. No-one saw a second or third deviation event market correction happening, and almost everyone got it wrong. You cannot change that.