FEATURE: Rebuilding after divorce

In a strange twist of fate, placement agent Spearhead Capital Partners is about to disband just as it begins to realise the fruits of its labours. Since forming in 2009, the firm has raised $469 million on behalf of clients, including GreenOak Real Estate, the business led by ex-senior real estate executives of Morgan Stanley Real Estate Investing; Hong Kong- and Singapore-focused Pamfleet Group; Asia logistics specialist The Redwood Group; and New York office investment firm Murray Hill Properties. Legacy mandates aside, these capital-raising activities will come to a close at the end of June.

I know we were up against one of the big placement agents, which was bidding on fees of 1.4 percent (of capital raised). I’ve never heard of a major placement group bidding for any business at less than 2 percent. That gives you an idea of where the industry is going
Anthony Biddulph

Michelle LeRoy, the firm’s Los Angeles partner, recalls how the firm took no salaries for two-and-a-half years and how, only in the last two quarters, have fees owed to the firm from its mandates begun to be paid. During an early morning call while walking her dog, she tells PERE: “It’s a shame. It was a marriage, and it’s definitely not fun getting divorced.”

The official line from Craig Wallace, the Hong Kong-based fundraising veteran who originally came up with the Spearhead name, is that the thesis underpinning the firm’s strategy simply isn’t viable given today’s capital markets environment. Rushing between meetings in the back of a taxi, he describes conditions as “awful” before pointing out: “We’ve been one of the more successful firms but, at the end of the day, we were raising blind-pool funds and that’s just a tough business to be in.”

Wallace’s explanation smacks of diplomacy, but it is apparent from speaking to him, LeRoy and London-based senior consultant Anthony Biddulph that Spearhead’s senior executives had differences of opinion over the firm’s strategy that led ultimately to the decision to sign a separation agreement last month. The Spearhead brand will continue for the next seven to 10 years, but only to collect fees from legacy assignments – the firm is believed to still be raising capital for GreenOak’s Japan fund, GreenOak Real Estate Japan Fund I, for example.

Moving on

Today, Spearhead’s partners are in the early throes of new ventures. Biddulph, the firm’s man on the ground in Europe, is sitting in an airport lounge in the Middle East when he speaks to PERE. The ex-European head of capital raising for AMB Properties, who worked for Spearhead as a senior consultant, gives off an air of trepidation when forecasting the immediate future for the placement industry. “I have a feeling this year will be worse than last year,” he says.

Describing an early mandate already lined up for his new firm – a Nordics-focused fund for which his client wants €300 million in equity commitments – Biddulph reveals: “I know we were up against one of the big placement agents, which was bidding on fees of 1.4 percent (of capital raised). I’ve never heard of a major placement group bidding for any business at less than 2 percent. That gives you an idea of where the industry is going.”

Meanwhile, a number of placement groups, particularly ones with big overheads, are trying to find “any kind of cash flow at the moment to buy themselves a year’s worth of breathing space,” Biddulph adds.

As Spearhead’s executives plot their next chapters, it is clear that they continue to face serious market headwinds. During a panel hosted by PERE at the recent MIPIM conference, Robert Weaver, a real estate capital-raiser who last year joined buyout giant TPG Capital, detailed onstage how $139 billion was raised for private equity real estate between 2009 and 2011 – less than the $142 billion raised during the peak year of 2008. “You can be sure the GP community has not shrunk by two-thirds,” he informed delegates. “There’s a real scramble among the GPs to raise capital in a shrinking community of capital availability.”

Jostling for position within this scramble are placement agents and, from certain accounts, the number of capital brokers in the marketplace isn’t shrinking either. Indeed, the fallout of Spearhead’s break-up could precipitate three new players to an already crowded arena.

The outlook is challenging for sure. Sonny Kalsi, co-founder of GreenOak Real Estate, hired Spearhead to raise capital in Asia and Europe for two of its real estate funds.  He believes placement agents have it tougher than fund managers as they are one place removed from decisions regarding the fund. “One thing I can do to accelerate capital raising is to work directly with investors to modify terms or address their concerns,” he says. “A placement agent can’t force me to do that, but they’re equally correlated to the difficult fundraising environment.”

Kalsi adds: “They’re not in the driver’s seat. Best case, they’re in the passenger’s seat. More likely, they’re   in the back seat.”

Go big or go home

Either you’re a single person acting for one or two groups, or you scale up like a Park Hill or a Greenhill
Michelle LeRoy

Wallace chooses not to dissect the disagreements at Spearhead, adding “everyone will have their own story.” However, he notes that the firm was reaching a crunch point anyway with regard to its corporate strategy. Initially intending Spearhead to be a business with a global reach, he eventually realised that considerable capital expenditure would be needed for it to compete for mandates with the likes of market leaders like the Park Hill Real Estate Group, The Blackstone Group-affiliated placement agent, or Greenhill & Co’s real estate capital advisory group.

Pointing to the blind-pool fund business, which was Spearhead’s primary focus, Wallace says: “For us to have had a proper crack at it, we would have needed to become a lot bigger. We’d have needed more people in the US and to have beefed up Europe as well.” Indeed, each side admits the firm might have had a better chance of representing GreenOak in the US if it had more people stateside. Ultimately, CP Eaton Partners was awarded the manager’s US fundraising mandate, owing to its deeper bench in the country.

“Either you’re a single person acting for one or two groups, or you scale up like a Park Hill or a Greenhill,” agrees LeRoy. “But that’s expensive and we didn’t have the ability or desire to put that much money to work.” When asked what such a ramping up would cost, LeRoy hypothesises: “The biggest cost is salary. A good capital-raiser earns a base of maybe $250,000 per year.” And overheads? “If you were to factor in office space, there’s probably a burn rate of about $70,000 per month.”

In Spearhead’s case, the principals actually were economising. “Craig, Nick (Ridgewell, the firm’s chief operating officer), Sam (Whiffin, its chief executive officer for Asia) and I didn’t take salaries for two-and-a-half years,” LeRoy says. Working from home also played its part, but “if you want to do it right you need to put money in,” she adds.

Looking forward

In the meantime, Wallace and Whiffin have launched Promote Capital, a boutique business focused on partnering with Asian real estate investment managers specifically for single-asset transactions, joint ventures and clubs that smacks of principal as well as agent. “We’ll start with Hong Kong and China, and we’ll work with international capital already mandated for this region rather than taking the approach of approaching everyone,” Wallace explains.

Notionally similar to Spearhead’s approach of co-investing in the funds they represented and sharing in the carried interest they earn, Wallace sees Promote as also having co-investment capabilities, albeit more for direct investments than third-party capital investment vehicles. “We see this as moving up the food chain,” he adds.

Biddulph has formed River Bridge Capital Partners, a placement agent focused on Europe and Asia, alongside Sydney-based Ridgewell, the one-time head of Aviva Investors’ real estate business in Asia, and Jocelyn Laudet, formerly a fund of funds manager at Paris-based private equity business Quilvest. Like Promote, River Bridge would raise capital for single-asset investments, joint ventures and clubs, but Biddulph plans to keep blind-pool funds in its armoury, starting with the aforementioned Nordic fund mandate.

Surveying the current capital-raising landscape in Europe, Biddulph says: “I agree with Craig that the demand for funds is very limited at the moment. That’s not to say they are not getting raised, it’s just that very few are.” In his experience, the greatest demand for funds presently is coming for Nordic or German investment strategies. As well as its fund mandate, he notes that River Bridge also is working on two separate account mandates.

They’re not in the driver’s seat. Best case, they’re in the passenger’s seat. More likely, they’re   in the back seat
Sonny Kalsi, GreenOak Real Estate

As PERE went to press, LeRoy’s plans were the least certain. For her, there lies a decision whether to work in-house for an established group or launch her own third-party capital business. Like the others, LeRoy, an 18-year industry veteran previously responsible for capital raising in North America and Europe at Macquarie Group, has her own company. It is called Tricon Real Assets Capital.

Fund consultancy might be an alternative option for LeRoy, as she thinks there could be unquenched demand for advisory services. “There are about 450 funds in the market, and I get about 10 calls per week from managers that want me to raise money for them,” she explains. “I might take on one out of 100, but there’s a service to be provided here and this could be a good source of interim cash flow.”

In this theoretical role, LeRoy pictures herself providing fund managers with things like a strategic capital-raising plan, a targeted investor list, help during the due diligence process and marketing material. “Everything short of being a placement agent, basically,” she says.

Feeling the squeeze

Should LeRoy turn Tricon into a functioning placement agent, she admits negotiating initial fees will be challenging. “I’m seeing downward pressure on fees, which will impact any new business model out of the gate,” she says.

From PERE’s research, it is not unusual for established placement agents to demand three percent of all capital raised – including equity not raised by them – when negotiating with clients. Invariably, that number gets negotiated downward.

Indeed, it was Spearhead’s willingness to be paid on the capital it raised for GreenOak, alongside its participation in the fund and its carried interest, that impressed Kalsi. “That was great alignment,” he remarks, extending an invitation to discuss further collaborations in the future. “I’m open-minded to working with them in whatever their next generation is.”

Still, Kalsi does have a concern for the placement agent world in general, suggesting that they are shouldering some of the blame for private equity real estate’s poor performing vintages around the start of the global financial crisis. “A lot is said about managers and how they underperformed in the last cycle, but there’s been a price for placement agents too. Some investors are turning to placements agents and are saying, ‘I invested because of your recommendation and I am not happy with the outcome’.”

Indeed, negative sentiment from investors is manifesting itself in various ways. PERE has heard how one Middle Eastern sovereign wealth fund had issued an internal circular to its investment professionals not to engage with any investment vehicles, including real estate, that have enlisted the help of placement agents. In another example, an investment bank has permitted placement agents to make introductions to prospective fund managers only, with no further involvement allowed.

At a time when placement agents are facing headwinds on multiple fronts, the senior figures of Spearhead have the added challenge of starting again, just as their original firm begins collecting the rewards of its previous labours. Nonetheless, while this ‘marriage’ has come to an end, three new businesses are in the offing. Fund managers looking for competitively priced advisors willing to be rewarded solely for their own work might want to take note.

Three degrees of separation

The parting of the senior executives of Spearhead Capital Partners is expected to precipitate three new firms. Here is what they are planning:

Name: Promote Capital
Led by: Craig Wallace and Sam Whiffin
Focus: Sourcing, underwriting and placing capital into real estate investment opportunities in the Asia-Pacific region via single transactions, joint ventures and clubs
Founders’ background: Wallace was the man behind the Spearhead brand, as well as the driving force behind the firm’s separation. He has spent 21 years in Asia and 25 years in real estate and capital markets, having held senior positions at Richard Ellis, Cushman & Wakefield, Clarion Capital and Macquarie Group. He also was once global head of the capital markets group at MGPA, the private equity real estate firm majority owned by the Australian bank. Whiffin, meanwhile, has spent 21 years in Asia, in addition to seven years in Canada’s real estate market. He previously was head of investor services for Asia at Jones Lang LaSalle.

Firm: River Bridge Capital Partners
Led by: Anthony Biddulph, Nick Ridgewell and Jocelyn Laudet
Focus: Placement of institutional capital in Europe and Asia for traditional private equity real estate funds, single-asset investments, joint ventures and clubs
Founders’ background: Biddulph previously was head of capital raising for Europe, the Middle East and North Africa at logistics company AMB Properties. Before that, he was a director for asset management behemoth BlackRock, where he led the institutional capital-raising team for real estate investments in Europe.
Ridgewell is another Macquarie alumnus. At the Australian bank, he helped launch various funds and REITs. Before becoming the chief operating officer at Spearhead, he was head of Aviva Investors Real Estate for the Asia-Pacific region.
Laudet, meanwhile, came from Quilvest Real Estate, the real estate component of private equity firm Quilvest, where he was a principal and worked on the firm’s real estate fund of funds programme.

Firm: Tricon Real Assets Capital
Led by: Michelle LeRoy
Focus: Either straight placement agent services or fund consultancy services
Founder’s background:  Spearhead’s now-former global head of placement is an 18-year veteran who has worked with fund managers, public and private REITs, real estate operators and institutional investors. She previously was head of capital raising for Macquarie in North America and Europe. Before that, she was a managing director at Bear Stearns, where she led the group’s efforts in originating and raising capital for third-party real estate funds.