If there is one thing you should know about Terry Ahern, it is this: he is a really nice guy. I think much of life is just developing goodwill with your clients by earning their trust over a period of time
That’s not a backhanded compliment, the kind you might use to describe a homely person with a “great personality”. It’s a straightforward, honest to goodness piece of praise—and one not easily meted out to members of the real estate community.
In an industry filled with larger-than-life personalities among GPs, LPs and pension fund consultants alike, Ahern’s low-key, laid back demeanor stands out.
A lifelong native of Cleveland – “people are generally decent and straightforward there,” he says – Ahern exudes the wholesomeness of the Midwest. He speaks softly in measured, thoughtful sentences. He often stresses the importance of integrity and ethics, the need to “do the right thing”. As he himself puts it: “I think much of life is just developing goodwill with your clients by earning their trust over a period of time”. Even a photographer for this magazine noted that “Terry was great to work with”.
Of course, not everyone has such a high opinion of Ahern. But some of those Ahern-haters have spent time behind bars, courtesy of Ahern himself. Prior to his current career as an institutional real estate consultant, Ahern spent four years as a lawyer – and for 18 months, he served as a criminal prosecutor in Cuyahoga County, trying cases involving rape, robbery and other felonies.
I think much of life is just developing goodwill with your clients by earning their trust over a period of time
Beyond the law
Despite the occasional virtues of being a lawyer, Ahern left the field in the early 1980s due to its limitations on originality and teamwork. And what he found lacking in the practice of law, he would later create for himself in his new career as an institutional real estate consultant. Real estate was a relatively new asset class for institutional investors and relative to other asset classes, it was inefficient. We thought there was a role where we could apply our knowledge and add value.
In 1983, Ahern and Kevin Lynch, a friend through mutual acquaintances, founded The Townsend Group, which was initially established to provide real estate investment advice to brokerage firms. Though both principals had previous real estate experience – Lynch in investment banking, Ahern through his law practice – consulting was nonetheless a relatively new field for both of them. Yet perhaps even more interesting than the creation of the firm itself was the genesis of the firm's name.
“Kevin and I were sitting there one day thinking about these names that would be attractive,” says Ahern, laughing. “And to the best of my recollection, I brought up Townsend because – well, you remember Charlie's Angels [the 1970s TV show about three female crimefighters]? It was Townsend Detective Agency. Now Kevin will debate that and say it never occurred, but that’s my recollection.”
Given the changes in US tax legislation that occurred in the mid-1980s, Townsend shifted its target client from brokerage firms and their high-net-worth clients to another group of investors with a significant amount of capital. According to Ahern, he and Lynch looked at the market to determine, first, where there would be large capital flows into real estate and, second, where those capital flows would need investment advice. All the dots pointed to tax-exempt pension funds.
“Real estate was a relatively new asset class for institutional investors,” Ahern says. “And relative to other asset classes, it was inefficient. We thought there was a role where we could apply our knowledge and add value. Going forward the challenge is: As the returns decline can we rationalise paying the level of fees that we currently pay?”
As Townsend has grown over the years, so too has the underlying real estate market and the investment options available to Ahern’s clients. “When you look at real estate, you can invest in the US and you can invest offshore,” Ahern says. “You can invest in the private markets and you can invest in the public markets; you can invest in equity and you can invest in debt; and you can invest in core strategies or you can invest in a continuum of strategies that reach all the way to private equity and real estate.”
In such an environment, Ahern argues, institutional investors can add significant value not by picking and choosing individual managers, but rather by focusing on a top-down investment strategy that incorporates a well-diversified mix of assets and geographies. It is a point he stresses often.
“The decisions that you make as you construct your strategy – making those choices about public or private equity, domestic versus offshore, from core to private equity – are going to be much more critical and important than the specific investment that a manager makes within a pooled fund or a separate account,” says Ahern.
Real estate was a relatively new asset class for institutional investors and relative to other asset classes, it was inefficient. We thought there was a role where we could apply our knowledge and add value.
If today’s environment provides a great deal of opportunity for investors to generate returns, it also carries with it significant risks, particularly given the amount of capital that is entering the sector. And in Ahern’s view, the primary risk – for LPs, GPs and debt providers alike – is a lack of thorough and diligent analysis. We have had a favourable investment environment and far less volatility in the sector than one would expecte
“What the entire industry may have at risk in this environment is a disciplined underwriting process,” he says. “Whether it’s an institutional investor getting into the fund, the investment manager acquiring the property or the lender making a loan in today’s marketplace more than ever, the requirement to be a disciplined underwriter is paramount.”
Underwriting discipline is a common theme in Ahern’s world. Throughout our conversation, he references the concept repeatedly. “When you talk about India and China,” he says, “you want to ensure that you’re not just caught up in the India or China story. These are very complex funds with issues that range from property-level issues, such as return on cost for development, to legal issues, such as ownership and tenant rights, to structural issues, such as takes.
“If I were to give any advice to people entering the industry, I would tell them: ‘Do the right thing and it will ultimately lead to success’.”
Yet his aforementioned skepticism reflects a natural caution – call it the consultant’s curse – towards those who jump on the latest investment idea without a thoughtful and prudent strategy. Across the board, the real estate industry has generated strong returns in recent years, which has led to riskier strategies being implemented in riskier geographies, some would argue without a lack of foresight. Ahern is not the only industry veteran that is stressing the need for caution, nor the only one who sees a potential shake-out among private equity real estate funds in the near future.
“After two decades in the industry I’ve learned that statements like ‘It’s a nine-inning ball game’ and ‘It’s a small world’ are absolutely true,” Ahern says. “So if I were to give any advice to people entering the industry, I would tell them: ‘Do the right thing and, assuming they're skilled at their craft, it will ultimately lead to success.’
“If you look at firms that have succeeded over the longterm,” he says, “you'll see firms that have thoughtfully prepared and executed a plan and not just raced in on the newest investment idea. That’s not to say you can’t be timely, but it needs to be done in a well-executed format.”
We have had a favourable investment environment and far less volatility in the sector than one would expecte