One of the main draws of February’s PERE Summit: Asia was a 30-minute, on-stage interview with Olivier de Poulpiquet, the co-chief executive officer and co-chief investment officer of Morgan Stanley Real Estate Investing (MSREI).
On the first day of the two-day event in Hong Kong, de Poulpiquet candidly talked about a number of issues, including how the $40 billion platform had reverted back to its former corporate ethos, the importance of gaining both investor and house support for the recent extension of its latest global opportunity fund and how regional funds would be the future investment model of choice. What follows are select excerpts from that interview.
PERE: You’re in your second stint with the firm, having re-joined in 2010. How has MSREI changed today from the time you were there before?
Olivier de Poulpiquet: First of all, we were a smaller group then. When I left the firm, we were between 280 and 300 people, and we are now back to that size. At our biggest, we were closer to 600 people globally – that was mainly driven by an increase in assets under management, which in turn led to the decentralisation of decision-making.
One of the big changes we made was to recentralise our decision-making process. We still look at deals across all markets, and our local teams execute deals and work with our network of operating partners across countries, but decision-making is now centralised. We can now better compare and contrast deals across the various markets and pick the best risk-adjusted investments. That’s one big difference.
The other change was to incentives and alignment of interest with our investors. We used to permit promote to be disproportionately allocated to professionals in charge of specific deals in their respective countries. We’ve changed that so that people sitting in Japan, for example, benefit from promote earned on deals done in Europe, Asia or the US. That was a significant change to ensure people have the right fiduciary approach for the investors. Everyone now has a vested interest in promoting the best deals, even if that means not investing in their own region or country.
PERE: Your appointment and that of co-CEO and co-CIO John Klopp was one of a number of senior changes at the firm in 2010. Was there a link between all the changes and fewer deal headlines for your latest opportunity fund, Morgan Stanley Real Estate Fund VII Global (G7)?
OdP: I don’t think there’s a link. After the global financial crisis, it was inevitable there would be management changes. Yes, John and I were focused on resizing and reshaping the platform, but the reason you did not see that many deals was because of our view of the markets.
In the US market, we had a positive view but wanted to do smaller deals. Our objective was to focus on off-market transactions, avoiding competition and focusing on acquiring assets on the right basis. We’ve now done about 20 deals in the US for that fund, but maybe those were not all worthy of headlines, given the average equity per transaction was around $50 million.
In Europe, we have been extremely bearish for more than the past two years. It was not yet about the sovereign debt crisis, rather it was austerity measures. We wanted defensive deals only and thought it way too early for distressed assets, so we only did four deals– all high-yielding, long-dated cash-flowing assets. For example, we bought a couple of retail portfolios in western Germany at a 9 percent yield against a 10-year weighted average lease. However, there weren’t many transactions like those around.
In Asia, we looked at a large number of transactions but set the bar very high. In fact, we were more of a seller than a buyer. We felt there was a lot of liquidity in the market, prices were very high and, de facto, we spent time focused on the management and disposal of assets. We sold about $5 billion of assets in Hong Kong and mainland China, for example. In Japan, we did five of what we call ‘flow deals’ – basically getting the right yield spread between the financing rate and the real estate – with some asset management activity as well. Those were deals of about $30 million in equity on average –again below the radar.
PERE: MSREI recently won more time to invest the better part of $2 billion for the G7 fund. What central message should our audience take away from that process?
OdP: We’re very proud of the support our LPs have given to us in approving the 12-month extension. Actually, it was 18 months because we spoke with our investors ahead of the expiration. It was a huge vote of confidence.
Investors saw the asset management and value creation work we did on our existing portfolio, as well as how prudent and disciplined we were when investing. That is why approximately 90 percent of them voted in favour of the extension. It was like doing a new fundraising, and we now have the best part of $1.5 billion to invest with a specific focus on Europe and Asia.
PERE: Understandably, most commentators placed large emphasis on how the vote would reflect the firm’s institutional support. However, little emphasis was placed on the fact that Morgan Stanley, your sponsor, approved going for the extension in the first place – they could have clawed back $200 million or so in co-investments. How important was that support?
OdP: It was a huge show of support for the group. Obviously, there has been noise around bank-sponsored funds, but Morgan Stanley was one of the very few that actually invested in the business during the downturn. Approving the extension of the fund was absolutely key.
I’d like to clear up another misconception that many commentators focused on, namely the relationship between assets under management and the share price. I don’t think that MSREI’s AUM is going to move the share price of Morgan Stanley. However, what might move the share price of Morgan Stanley is MSREI performing and making money for our clients. That will improve our relationships with our LPs, bring more business to the firm and ultimately drive the share price.
PERE: You spent most of your career in Europe, so can you tell our Asian audience what they should make of the current Eurozone crisis? How concerned should owners of Asian real estate be about whether Greece defaults or not, for example?
OdP: Everyone should be concerned about what is happening in Europe, although you shouldn’t be scared. I think it will take a long time for the European crisis to be resolved as there are too many political and economic interests at play for it to happen in one shot. Germany is in the driver’s seat, and I think it’s politically very hard for them to push through a quick resolution. It also would be a counter-incentive to do so, as the country probably has been the biggest beneficiary – the fact that the euro is depreciating is huge for German exports. Nobody wants to see the euro fail, so I think this crisis will drag on but ultimately will be resolved.
With a prolonged resolution period comes uncertainty, but also opportunity. Look at the markets in Asia, where European banks are exiting at the moment. That creates opportunities for GPs, funds and investors to pick up those assets, to manage them through and to create value. We already have done a number of deals like that for our fund. For example, in Australia, we bought a significant portion of the loan book of one of the big UK banks.
PERE: Whenever there is an economic crisis, there comes an inevitable wave of new regulation. Of relevance to MSREI are the Dodd-Frank Act and the Volcker rule. Mindful of such regulations, many of your investment bank-sponsored peers have deserted the private equity real estate world, yet MSREI stays engaged. Why is that?
OdP: The first thing to say is that we think having a real estate group within a big institution like Morgan Stanley is strategically important. For us, the Volcker rule really has two impacts: one is the three percent capital requirement and the other concerns the name. Let’s put the name thing aside as it’s more of a detail. In terms of co-investment, while we traditionally invested 10 percent, we are now forced to co-invest just 3 percent, so that’s what we’ll do. If you look across our industry, there are a lot of fund managers that invest less. The key should really be the incentives and alignment of interest of the team with investors.
Having said that, the answer really sits with the LPs. We’ll go to the maximum we can, but we’ll also show how we are remunerated and aligned and how we respect our fiduciary duties. That will be the key to our success. We also must ensure we are offering the right product.
PERE: I’m glad you touched on having ‘the right product’. You mentioned at our Asia roundtable in October that smaller, regional funds with tighter investment strategies was a sensible approach going forward. Having focused on global mega-funds most recently, should we now expect your next efforts to represent something of a switch to regional funds?
OdP: I think there is room for global products, regional products and country-specific products, and we have a chance in Asia, where there is less competition, to create a number of products. For example, we spoke earlier about core and core-plus products, and we think there is room for more of these in this market.
That said, remember that we currently are managing a global fund. Therefore, we are focusing on managing our portfolio and investing from that fund. We are in continuous discussion with our LPs and will target the next fundraise on the basis of their feedback, but it is possible it could be a regional fund.