SPECIAL REPORT: REPIA’s new direction

News this summer that Edward Siskind, global head and chairman of Goldman Sachs’ Real Estate Principal Investment Area (REPIA), is set to retire from the firm has once again thrust the spotlight onto one of the most scrutinised private equity real estate platforms in the sector.

“They are done,” declared one rival GP. “They’re out of the business,” determined another. “There’s just no doubt about it.”

For the past couple of years, such utterances about the Wall Street giant have been rife in the corridors of industry peers. The departure of long-serving Siskind, just five months after that of his co-head Richard Powers, has poured more fuel onto an already burning fire.

On 27 June, Goldman Sachs sent a memo – obtained by PERE – to REPIA staff and investors, explaining that Siskind, alongside REPIA’s developing markets real estate fund head Jean de Pourtales, would retire from his role at the end of the year. His responsibilities would fall to heir apparents Alan Kava in Goldman’s New York headquarters and James Garman, based at its European headquarters in London. Despite the replacement appointments, doubts remain about whether the one-time biggest player in the opportunistic real estate investing space, which today presides over a global portfolio valued at $34 billion, has the support both internally and externally to continue as before.

One GP shared his interpretation: “[Garman and Kava] are overseeing the wind-down of the $34 billion [portfolio] and selectively will put out money from the balance sheet where they see opportunities. But that’s a far cry from being able to raise more money. It’s just not a sustainable model for the firm.” Indeed, according to statistics from Real Capital Analytics, Goldman Sachs sold the eighth-highest amount of real estate worldwide in the last 12 months, collecting $3.8 billion through 33 asset sales and backing the belief that the predominately opportunistic platform is a net seller.

There are those, however, that tell a different story. Not all talk is of a curtain call for REPIA, whose name is considered synonymous with its Whitehall Street opportunity fund series and which, since its inception in 1991, has raised approximately $26.5 billion in equity and acquired more than 32,700 assets across 36 countries at an aggregate cost of more than $170 billion.

Goldman Sachs declined to comment when approached, but PERE spoke to sources who believe it is premature to determine the future – or lack thereof – of the platform, which now forms part of Goldman Sachs’ Merchant Banking Division. They argue instead that certain important factors must be determined first, namely the ramifications of incoming US regulation such as the Dodd-Frank Wall Street Reform and Consumer Act (particularly the Volcker Rule), which stands to limit the private equity activities of ‘banking entities.’ One such source went so far as to predict the firm could launch new funds within a year, regulation permitting.

Another unknown factor is the fallout from the performances of REPIA’s current funds, including Whitehall International 2008, which closed on approximately $2.3 billion in May 2008, among certain others. Positive performances from these could see the platform ramp up its fundraising activities, certain sources said.
Green shoots from charred soil.

Many of REPIA’s issues are perceived to stem from the investments of its Whitehall Global 2007 fund, which closed in May 2007 with approximately $4.2 billion in capital commitments, alongside investments by certain prior funds. REPIA is understood to have overpaid for assets, deploying too much leverage in the process. For example, the Financial Times reported last April how the $1.7 billion Whitehall International 2005 was on course to lose 98 cents on the dollar.

“Two years ago, when the whole world was blowing up, [Goldman] thought everything would need to be handed back to the lenders and there would be bankruptcies,” said one source close to the firm. “Two years later, however, values are coming back.”

As a result, REPIA’s debt obligations are understood to have become easier to manage with the larger loans tied to its portfolio – those originally having maturities of 2012 and 2013 – now either recapitalised, restructured or, in many instances, extended. Indeed, Siskind’s departure is regarded by some as a signal that the portfolio has been somewhat stabilised. “Now he has left it for the next generation,” one former colleague said.

These words chime with Goldman Sachs’ memo to staff and investors: “We feel that market conditions are now beginning to improve, and our efforts over the last 18 months have stabilised operations and provided our portfolio investments with improved capital structures. As a result, we believe we are better positioned to take advantage of harvesting opportunities as the markets continue to recover.”

With improving market conditions suturing significant parts of its existing portfolio, or at the least staving off further write-downs, whispers of future capital outlays have emerged. Although REPIA, for all intents and purposes, has no Whitehall capital left for US acquisitions, the platform – keen to capitalise on widespread liquidations, delinquencies and distressed situations across the country – still is leading deals on behalf of the bank’s other capital pools.

Last month saw an example of that when REPIA edged closer to the $1.26 billion acquisition of a 10-property office portfolio in Rosslyn, Virginia from entities of collapsed Wall Street rival Lehman Brothers. That deal, which is expected to close this month after having been approved by US Bankruptcy Court, was struck on behalf of US Real Estate Opportunities I, a $1.995 billion fund formed in 2008 between REPIA and sovereign wealth fund clients of Goldman Sachs to invest in core-plus to opportunistic investments in major US submarkets.

Whether that is one of the last real estate investments in the core space led by REPIA remains to be seen in light of last October’s launch of a core real estate investment business by Goldman Sachs Asset Management. That effort is led by former ING Clarion Partners executive Jeffrey Barclay.

Meanwhile, another still-active REPIA fund with a focus on the US is GS Real Estate Mezzanine Partners, a fund that attracted $2.63 billion in commitments between 2006 and 2009 to invest in real estate mezzanine loans, B-notes, CMBS and real estate-based corporate debt. For that fund, REPIA has originated and executed more than $2 billion in transactions over the past 18 months.

There also is $1.5 billion in dry powder for European and Asian investments from the $2.3 billion Whitehall International 2008, which has one year left on its investment period. The investments made so far for that fund currently are reflecting mid- to high-teen returns, PERE understands. Should the remaining capital of the vehicle and REPIA’s other funds replicate that performance, parties both internal and external, especially the bank’s investors, could well back future fundraisings.

The rules dictate

Current fund performance aside, exactly how Goldman Sachs positions its private equity real estate platform to best engage the sector is very much dependent on incoming US regulation, particularly the extent to which ‘banking entities,’ as defined under the Volcker Rule, are permitted to invest in private equity-style businesses. Basel III regulations, which set out higher minimum capital requirements of banks, also will play a part.

Still, clarity is coming. The Volcker Rule should be finalised this autumn, while the gradual phasing-in of Basel III’s requirements begin in 2013.

However the rules ultimately are defined, Goldman Sachs will comply with them. One source suggested REPIA might investigate making investments using the Goldman Sachs balance sheet before syndicating the equity on a deal-by-deal basis – something akin to the club investing that has become more popular in the sector today, particularly among the world’s largest institutional investors, many of which are clients of the investment bank. “There are lots of ways,” the source said. “It all depends on what the ultimate rules say.” Of course, that could precipitate the end of the Whitehall Street brand, although not necessarily REPIA.

Renown for co-investing between 20 percent and 30 percent in its real estate funds, Goldman Sachs is unlikely to back a model that is permitted to co-invest only 3 percent. “The firm has a big balance sheet and likes to allocate its resources,” another source said, adding that its investment and management fees described in a PERE profile of the platform in 2008 as “substantially higher than anyone else” are not a motivator when compared with the sheer size of its typical fund investments. Indeed, the same source called them “meaningless in relation.” Should Volcker curtail such sizeable co-investments, the firm also might consider becoming a more active opportunistic real estate debt provider, although that would remain somewhat hypothetical until the regulatory environment becomes more certain.

Goldman’s allure

In the meantime, REPIA’s main challenge is staff retention. More than a couple GPs have claimed to PERE that they have received CVs from employees of the platform, typically acquisitions-focused people.

Not including the approximately 1,500 staff at Archon Group, the Goldman Sachs affiliate that provides REPIA with a wide range of services for both its direct real estate investments and loans, REPIA has 28 professionals left, 13 of which are based in the US and almost all of which are focused on portfolio management or financing.

Indeed, incoming US head Kava, for instance, was a former chief financial officer of the platform, responsible for agreeing the various debt recapitalisations and restructurings across its funds. “The guys responsible for maximising value as opposed to buying the next deal, those are the guys who have stayed,” one source said. “If I was an investor in the next cycle, those are the guys I would want investing on my behalf,” added another.

Should REPIA’s portfolio stabilisation efforts continue to rejuvenate value, its live funds hit and/or exceed their performance targets and the regulatory environment provide the prerequisite green lights to ramp up its opportunistic fundraising and investing once again, increasing the number of bums on seats at REPIA should not prove difficult. The platform had some 130 dedicated professionals at its peak, and it is not unforeseeable something approaching that number could be reached again.

The prospect of working for the world’s best-known investment bank as real estate markets rebound remains an allure many surely would not refuse.