SPECIAL REPORT: Combining skill sets

When the news about Los Angeles-based Ares Management signing a definitive agreement to buy New York-based AREA Property Partners for an undisclosed sum hit the private real estate sector, it understandably turned a number of heads. After all, once the ink is scheduled to dry at the end of September, the combined firm will have about $8 billion of committed real estate capital run by a team of more than 70 investment professionals. 

The deal, which includes Ares buying out National Australia Bank’s 35 percent stake in AREA that was acquired in March 2011, marks a rather logical step for both firms at a time when both organizations can mutually benefit from one another. Not only have some sources called this transaction a ‘best of both worlds’ scenario for both Ares and AREA, but it also points to a possible consolidation trend that a number of industry insiders have been prognosticating. 

In a statement jointly issued by both firms last month, Tony Ressler, senior partner and co-founder of Ares Management, said: “AREA’s expertise in value-added and opportunistic equity investing and mezzanine debt will complement our real estate group’s current capabilities in real estate private lending. The entire Ares Management platform will greatly benefit from AREA’s geographic reach, industry relationships and investment professionals,” he added, citing in particular AREA’s chief executive officer Lee Neibart and head of Europe and India William Benjamin.

Indeed, this move represents major benefits for both organizations. For Ares, the firm does not have to create its own real estate platform from scratch in order to become a heavyhitter in the private real estate sector. For AREA, it is now plugged into a larger, more global platform.

Initial considerations

Although terms of the deal have not been disclosed and representatives from both organizations declined to comment beyond what was said in the statement, here’s what PERE does know about the acquisition so far: Neibart will become a senior partner and co-head of the Ares Real Estate Group, along with the platform’s current senior partner and head, John Bartling. Benjamin, meanwhile, will become a senior partner of the Ares Real Estate Group and continue as head of Europe and India real estate.

“Our expanded offering will make the Ares Real Estate Group a differentiated manager with global investment capabilities across the capital spectrum, from debt to equity,” Bartling stated in the announcement.

In addition, all existing AREA investment vehicles will continue to be managed by legacy AREA investment executives in their capacities at Ares Management. This includes the firm’s AREA US Value Enhancement Fund VIII and its AREA European Real Estate Fund IV, both of which currently are in market and seeking a combined total of $1.7 billion in commitments. It’s still uncertain, however, what will happen to the AREA brand or name moving forward. 

The takeover of AREA also marks the beginning of the end of the Mack family’s involvement in the business. Although it’s unclear if this deal triggered AREA founder William Mack’s retirement or his impending retirement helped facilitate this deal, one thing is certain: William Mack will be stepping down from his position as chairman to focus on his family’s real estate initiatives, investments and various philanthropic pursuits. 

Meanwhile, Richard Mack, his son, will become a senior advisor to the Ares Real Estate Group. One source told PERE that, like Ares and AREA, Richard will have the best of both worlds in his new role. Once he sees through all of his legacy obligations under existing funds, he can stay on as a senior advisor as long as he’d like, yet he won’t necessarily be obligated to have any management responsibilities. 

Planting the flag

Ares has been interested in growing its real estate capability for some time now. As far back as when ING Real Estate Investment Management (REIM) was on the selling block, the firm has been looking to make its move onto the scene. Indeed, Ares was said to be one of the bidders for the Dutch real estate platform in 2010. Alas, it was not meant to be, as CBRE Global Investors wound up acquiring ING REIM in 2011.

Still, Ares was not deterred. Eventually, the firm did become a player in private real estate. Not surprisingly, given that Ares is well known as a credit investor, it started out in the real estate debt space, buying the investment platform of Wrightwood Capital, a provider of debt capital to the US commercial real estate sector, in August 2011. As a result of the Wrightwood transaction, more than 40 professionals wound up joining the Ares Private Debt Group to focus on middle-market lending in the commercial real estate sector.

The acquisition of Wrightwood signified Ares intentions in the real estate business. With the purchase of Wrightwood being the first step in building a real estate platform, the acquisition of AREA represents another crucial component, specifically the addition of an equity capability. 

Ares buying AREA, a business with a solid track record and funds already in the market, means that the firm doesn’t have to convince investors it has a track record. After all, raising a first-time fund is a very challenging undertaking under the best of circumstances, so this deal has saved Ares a considerable about of time and money. It also is able to compete with the likes of TPG Capital and Kohlberg Kravis Roberts (KKR) in the real estate realm without having to take the time to build its own platform from the ground up. 

“The Ares Real Estate Group will now be a significant player at a time when we are seeing increasingly compelling opportunities in existing and new mandates,” said Neibart in the issued statement.

Furthermore, this transaction comes as Ares may be looking to go public. Citing sources familiar with the matter, The Financial Times reported early last month that Ares is preparing for an initial public offering in the US. The report stated that the firm could launch an IPO in the next few months. 

Ressler, however, has been somewhat coy on the subject, having been quoted in February as saying: “It’s not something we are actively considering or have enormous interest in today. We are never the first, but we are aware of it as an opportunity.”

A huge alternative

While Ares was looking to grow its real estate platform, AREA – though not necessarily looking to sell the firm – was looking at its business as well as the evolution of how real estate is positioned within alternatives. Ultimately, AREA was aware that it could be at a competitive disadvantage if it stayed a middle-market real estate manager as opposed to a real estate manager that’s part of a much larger alternatives business.

Indeed, both firms were cognizant of major changes within the market. According to one source, both Ares and AREA were acutely aware that investors are looking to place more capital with fewer managers. Recently, such institutional investors as the Teacher Retirement System (TRS) of Texas and the New Jersey Division of Investment have made very large commitments to very large alternatives managers, with those commitments getting layered across all the different asset classes within. 

When New Jersey’s pension plan committed up to $1.8 billion to funds managed by The Blackstone Group in late 2011, for example, that allocation was divided among Blackstone’s hedge funds, credit opportunity funds, private equity and real estate. Similarly, TRS committed $3 billion each to KKR and Apollo to invest across a variety of asset classes and strategies. 

Since AREA is only a real estate manager, it has been ineligible for such massive allocations from investors. Meanwhile, since Ares has not had a substantial real estate platform, it too has been unable to win such contributions from investors.

Therefore, Ares and AREA began discussions about how to go about collaborating as a means of helping each other receive these large allocations from investors. Through those discussions, the firms realized there was a lot of history between the two firms — both were spinoffs of Apollo Global Management — and the discussions led towards consolidation.

“What’s happening here is that two strong organizations are looking at one another and concluding that ‘one plus one should equal three’,” said David Hodes, co-founder and managing partner of New York-based advisory firm Hodes Weill & Associates, which acted as strategic advisor to AREA.

Neibart added: “Combining the complementary skill sets and asset classes of both firms will yield superior sourcing opportunities and enhanced credit analysis and information flow that will enable us to bring new products to investors.” 

Although some insiders expected to see more consolidation so far this year, it appears as though the trend is beginning to pick up some steam. Indeed, shortly after Ares announced its takeover of AREA, BlackRock announced its acquisition of MGPA. And with investors continuing to allocate more funds to fewer managers — specifically, large firms with diversified alternatives platforms — it wouldn’t be surprising if the industry saw more deals like the one between Ares and AREA.