SPECIAL REPORT: On the comeback trail

Until recently, RREEF was having a hard time communicating its direction and strategy to investors. Hamstrung throughout 2012 by corporate uncertainly, the senior team was not allowed to say anything publicly as parent company Deutsche Bank held talks about selling most of its asset management group to Guggenheim Partners. The radio silence was prolonged when those talks narrowed to just a sale of RREEF before the sale eventually collapsed.

In the aftermath of that disaster, things finally are beginning to thaw. Deutsche Bank now is being run by new co-chairmen, Jürgen Fitschen and Anshu Jain, who replaced outgoing chief executive Josef Ackerman in May. In September, the bank announced a final decision to keep RREEF within a newly integrated Asset & Wealth Management (AWM) division run by Michele Faissola.

In his first interview with PERE since Deutsche Bank announced its initial strategic review in 2011, Pierre Cherki, global head of RREEF Alternatives, lays out the big picture for the €50 billion alternatives platform. Topics include how the group will expand its global investor base, what the plan is for future fundraising, how much re-hiring the business will do, where opportunistic investing fits into its strategy and the move towards ‘real assets’ as an asset class.

Cherki, who joined RREEF in 1997, says: “I think that 2013 is in many ways an opportunity to turn the page. We spent most of last year on organisational issues, first on the strategic review and then on work within the AWM group. In 2013, we want to move back to focusing on growing the business.”

The most recent corporate development, which Cherki calls “the last piece of the jigsaw puzzle,” was the announcement in January of the senior team across RREEF Alternatives, including its infrastructure business. The biggest news was that John McCarthy, the global head of RREEF Infrastructure who joined the bank in 2005, has left. The infrastructure group is now being run by Hamish Mackenzie and Nadir Maruf, who formerly was head of infrastructure for Asia-Pacific and is now taking on an expanded role to cover all alternative asset classes in the Asia-Pacific region, including real estate.

The new leadership team that reports to Cherki consists of Georg Allendorf, head of real estate Germany; Theresa Gusman, head of commodities; Todd Henderson, head of real estate Americas; Michael Luciano, chief operating officer; Nadir Maruf, head of Asia-Pacific alternative investments; Hamish Mackenzie, head of infrastructure Europe and infrastructure debt; Gianluca Muzzi, head of real estate Europe ex Germany; Mark Roberts, head of research and strategy; and John Robertson, head of real estate and infrastructure securities.

A focus on retail

Fundraising has clearly been an issue for the alternatives division. Despite having one of the most well-regarded infrastructure teams, RREEF recently ended up giving back the €620 million raised for a first closing of its second fund, reportedly at the behest of limited partners.

First and foremost, Cherki notes that RREEF is focusing on “clients and performance,” but the game plan is clearly to move forward. “We have a broad platform with real estate, infrastructure and our commodities business,” he says. “What we wanted to do was make sure the performance of the products was good and then look at the strength of the platform globally to make sure we can offer our products to a broad base of clients.”

Cherki continues: “When you look at the past, we had a very strong focus on institutional clients, other than in our German open-ended real estate funds. Most of the platform was focused on institutional, but we want to make sure we look more broadly at retail clients.”

RREEF is seeing that retail investors are becoming more and more important as an investor segment. The move from defined benefit pension schemes to defined contribution plans is an important trend because very often it is the ordinary saver that is making the decisions as to how and with whom to invest.

Cherki believes a lot of the services RREEF offers to institutional clients would be welcomed by the retail world. “It is interesting because, in the past, the choices for retail investors were very limited, and there also is the issue of liquidity,” he says. “We are looking at how we can combine direct and public securities in one offering.”

Part of the answer may be gleaned from how RREEF has begun a retail push in the US, where it recently launched a non-traded REIT called RREEF Property Trust. The firm is publicly offering up to $2.5 billion in shares of common stock in that vehicle, which is looking to invest in high-quality, income-producing commercial real estate properties and provide daily valuation updates.

“It is a core offering to retail clients,” Cherki says. “More broadly, in terms of defined contribution pension schemes, most of the work is done by large institutions that are managing these plans.”
Getting real

Clearly, the US REIT is one offering for which RREEF is raising capital. However, Cherki notes that the business typically has a number of products in the market for commodities, real estate and infrastructure at any one time. For regulatory reasons, he says it is difficult to be explicit, but talks with investors are along the lines of “customizing” products, given that the business is geographically diverse across the US, Europe and Asia. Indeed, RREEF is pursuing a combination of commingled funds and separate accounts, the latter tending to be for larger institutional clients.

RREEF is lucky in a sense because Deutsche Bank has a large private wealth and distribution business that helps the firm’s fundraising prospects. Cherki says RREEF is giving equal emphasis to commodities, real estate and infrastructure, as the global trend is towards alternatives in general.

“On the one hand, the world is quite volatile, but the trend we have seen through the financial crisis – and we constantly see it – is allocation to alternatives,” Cherki says. “It is growing, and this is where we have the expertise. Obviously, investors are taking more time to make investment decisions work with the right partners. We are active participants in these discussions, and being a player in this arena is very exciting.”

Some of RREEF’s competitors, such as JPMorgan Asset Management, are pushing ‘global real assets’ as a business line, incorporating real estate and infrastructure. That movement towards real assets fits in with investors’ desire for assets providing an inflation hedge, income and something tangible. Following suit, it seems as though Deutsche Bank might be going down the same avenue, with a name change in the offing.

“Deutsche Asset & Wealth Management will be our divisional brand, bringing all product offerings together,” Cherki says. “We have a large number of brands that we intend to harmonise and, as we are very much in the real assets world, ‘real assets’ will feature.” Fund names, however, will remain the same.

Other considerations   

Despite well-publicised departures at RREEF amid cost cutting, the alternatives platform remains large, employing more than 500 in 22 offices. Cherki says departures were about “rightsizing” and making sure the “right people” were in place.  As last month’s announcement made clear, it has the senior team in place, but it also has a hiring plan just like any other “healthy organization.”

With RREEF angling towards real assets, which indicates a preference towards income-producing assets with less risk, it would be fair to assume that opportunistic real estate investing would be off the agenda. Indeed, those that know the firm say opportunistic investment is practically dead, with most of the team having left.

Cherki, however, disagrees. “We are going to keep looking across the risk spectrum, but we also listen to what the clients are telling us,” he says. “Over the last three or four years, they have told us that they are looking to allocate more capital on the core side of real estate.”

Of course, there is not only the issue of raising capital, but also of deploying it. “Deploying opportunistic capital in the large European markets today is very difficult, not only because debt capital is not very available but also in terms of where the markets are,” Cherki says. “How do you price assets in the current market with a degree of uncertainty? The sellers are not in a hurry to sell at distressed prices.”

Business as usual

Despite the previous corporate uncertainly, RREEF still was making real estate investments on behalf of its clients. In Europe, it has been investing in primary markets, although southern Europe has been out of the question. The UK has been by far the largest market with a new wave of institutional capital looking to develop global strategies, Cherki notes, adding that such investors typically start with London.

Last month, for example, RREEF announced a deal struck on behalf of a consortium to buy One Angel Square, an office block in central Manchester, for £142 million (€164 million; $220 million). RREEF declined to divulge for whom it was investing but, according to reports, Ginkgo Tree is among the consortium. Gingko Tree is owned by the investment company of the People’s Republic of China, which in turn is the investment vehicle of the Chinese Government’s State Administration of Foreign Exchange.

That said, some capital is beginning to spread to other locations. Apart from the main markets of Europe, there has been high interest in US real estate, as well as some of the larger markets in Asia and Australia, Cherki notes. “It is the large core liquid markets that have continued to attract significant capital,” he adds.

RREEF plans to continue to look at products both on the equity and the debt side, but Cherki says is clear that investors currently are focusing on real assets and on the core side, where they are looking at cash flows, inflation protection and treatment of capital. “And we are listening,” he adds.