PERE: Why did KKR decide to get into private equity real estate now?
Ralph Rosenberg: KKR had been thinking about being in the commercial real estate business for a while. I think it was one of the worst-kept secrets in the industry. At the end of last year, it became relatively obvious to the senior leadership of KKR and to me that it would be the perfect moment in time – in terms of what was happening in the real estate capital markets, what was happening in the investor community and what was happening to Wall Street – for me to take on the challenge of running the business.
PERE: Why get into real estate at all?
RR: The simple answer to that is that we believe we are stewards of capital for our limited partners, who effectively have invested in our intellectual capital and discipline in order to do very smart things with their capital on a risk-adjusted basis. If you think about that as a very high-level mandate for the firm and then you peel back the onion, the firm was doing what I just described in a disciplined, robust way in the traditional corporate private equity arena for many years. In 2006, we decided to start diversifying that mandate to service our core investors more thoroughly by offering the opportunity to those investors to manage other types of capital for them than just traditional private equity.
PERE: So this is evolution for the firm?
RR: Yes. Most people don’t realise this, but the firm runs about $61 billion in assets and $45 billion is in private equity vehicles. There is $16.5 billion in non-private equity-related activities with the mandate to be a full-service provider of capital and steward to our investors. So the natural evolution of that business model ultimately must be in the real estate capital markets because, as we all know, it’s the largest asset class on the planet. If you really are going to fulfill the mission of being a real fiduciary of capital to investors, you want to be able to help them through their whole asset allocation model and to be able to objectively think about helping for each of the components of that model.
PERE: What is the advantage of KKR being public?
RR: A public balance sheet gives us cash to invest directly into the market in opportunities that involve commercial real estate without having to raise third-party money and to effectively use our capital as a currency to launch new strategies. We’re going to use that cash, which is about $2 billion right now, to proactively invest in asset classes with risk-adjusted returns and effectively demonstrate to the market and our LPs that we’re good stewards of capital. It’s not about trying to generate income or cash flow off the balance sheet to distribute to our shareholders. It really is the opposite, which is to create a one-stop, global asset management platform for our biggest investors, of which we have 360.
PERE: Isn’t the real estate model of asset management different than private equity?
RR: We run $17 billion that isn’t private equity, and the compensation model in that ecosystem varies dramatically off the 2 and 20 model. I think the reason we do that is because we honestly believe our job is to be asset managers across the spectrum for our clients. If we do that well, we’re going to get rewarded for that, not only by our clients but by the capital markets because we’re a public company. So we are perfectly willing and interested in running real estate capital under compensation structures that don’t look like 2 and 20.
Ten years from now, I promise you that, if I’ve done my job correctly, we will be opportunistic players, mezzanine debt players, value-added and core. As we all know, core managers don’t get paid 2 and 20, and there has been no conversation with Henry (Kravis) or George (Roberts) about how we are going to raise 2 and 20 money. It’s been the exact opposite. We’ve got access to a bunch of capital, and my mission is to be steward of that capital. One of the things about KKR that everyone needs to appreciate is that nobody at KKR owns a piece of their own fund. Everyone at KKR owns a piece of the global business.
PERE: Is KKR seeing real estate deal flow here in Europe?
RR: Sure. The firm is interested in investing in a workout situation with a major bank, a London development with one of the UK’s major developers, a sale-leaseback transaction and a transaction with a distressed borrower in Ireland. We’re solving the bank’s problem, we’re solving the operator’s problem and there’s an island of relationships that allow us to add value. That’s where we are going to spend our time.