SPECIAL REPORT: The desired outcome

It is a remarkably informal affair for a first interview given by the heads of the two firms involved in the most widely talked about corporate acquisition in private equity real estate this year. The casual shirt worn by Jim Quille, MGPA’s chairman, befits a man close to retirement following the imminent sale of a business he founded almost a decade ago. Jack Chandler, the head of BlackRock’s global real estate business, is here in London just hours after a long haul flight from America and sees no need to suit up for the occasion. Still, make no mistake – this is a serious transaction and formal attire will be worn in the days to come as the two men meet investors.

Quille and Chandler sit in one of the umpteen meeting rooms that MGPA has rented at London’s Corinthia Hotel, off Whitehall. These will be used for the Asia- and Europe-focused private equity real estate firm’s annual investor meetings, in which backers ranging from sovereign wealth funds to fund of funds likely will pepper Quille, Chandler and other senior management with questions. These investors will want to get comfortable with the purchase of MGPA – with its 220 staff and $12 billion in real estate assets – by the world’s largest asset management firm, with more than 10,000 staff and $3.9 trillion in assets across multiple business lines.

Subject to regulatory approvals on both sides, the transaction should complete in the third quarter of this year, after which BlackRock will have joined the private real estate industry’s major leagues with a combined $25 billion in assets under management. “Change can be disturbing,” states Quille. “However, once LPs have a chance to look at this deal, they will realize it is a great fit.” 

With no investor vote necessary, MGPA was able to conduct the sale autonomously. Beyond some early conversations with select investors, the time for the bulk of the firm’s capital providers to query the deal will be the days to come. “The first question everyone wants to know is who will run my fund,” Chandler suggests. “I can safely say nothing is changing.”

No overlap 

Based on preliminary discussions, Quille and Chandler are confident that MGPA’s investors, which include the Canada Pension Plan Investment Board and the New York State Teachers’ Retirement System, will greet the integration of MGPA’s executives into BlackRock’s matrix with enthusiasm. With virtually no strategic overlap between BlackRock’s US-focused and core-centric real estate platform and MGPA’s opportunistic and development-driven Asia and European businesses, there is little to fear in terms of senior attrition. 

Quille, now 63 years old, will continue to live in Singapore until the end of the year, when he will become a vice chairman in an advisory role for BlackRock. And, as previously announced, executive director Andrew Wood and European chairman Digby Okell are retiring at the end of 2013. However, other senior operational folk at MGPA will be assuming senior roles within the combined business. 

Meanwhile, Quille and Chandler are going to impress on MGPA’s investors how the two real estate platforms will fit together. Chandler explains it by reviewing the legacy components individually.

“In Asia, where MGPA is strong, BlackRock recently hired a CIO for APAC Real Estate Securities, the real estate business’ first employee in Asia, so no change needed there,” Chandler says. “In the US, where BlackRock is strong, MGPA has one person who now gets an office in Manhattan instead of working from home. BlackRock has a high-yield debt business and MGPA doesn’t, so that business doesn’t change. It also has an active REIT business and MGPA doesn’t, so that doesn’t change either. MGPA has a European and UK value-added business while BlackRock has the largest open-ended core fund in the UK, so no overlap again.”

In all, BlackRock will be adding MGPA’s 220 staff to its existing 150 real estate professionals. BlackRock’s property division operates from offices in New York, Boston, Pittsburgh, San Francisco, Los Angeles and London. Buying MGPA brings additional offices in Frankfurt, Paris, Luxembourg, Warsaw, Copenhagen, Singapore, Kuala Lumpur, Hong Kong, Beijing, Shanghai, Tokyo and Sydney.

Feeding the capital machine

Beyond the people, buying MGPA provides BlackRock with a real estate business that has enjoyed strong institutional support since Quille, Wood, chief executive officer Simon Treacy and others formed the firm via the spinout of a fund management platform from Australia’s Lend Lease in July 2004. Since then, MGPA has raised 11 private equity real estate funds that have attracted approximately $8.6 billion of equity, including $3.9 billion for MGPA Asia Fund III, the region’s largest opportunistic real estate fund. Thanks largely to that fund, the firm has invested more than $10 billion in 126 properties in Asia, including 14 development projects across the region. 

Asia Fund III and its European counterpart have concluded their investment periods, and Quille says the platform is looking forward to benefiting from BlackRock’s sizeable distribution network as it proceeds with furthering the series. “Everyone in our shop is bursting out of their skin to get started,” he says. “Our distribution guys are feeling the same way because their clients have been asking for high-quality alternative products with good track records and with strong teams,” Chandler adds.

Neither principal could discuss specific capital-raising plans, although MGPA Europe Fund IV was introduced to the market in November 2011 and has collected $100 million in commitments so far. PERE understands that lawyers were appointed to draft plans for MGPA Asia Fund IV late last year, and that fund could be expected to haul between $2 billion and $3 billion.

In fact, all MGPA’s strategies will continue, confirms Chandler. Although the firm is best known for its opportunistic funds, since the start of the global financial crisis and partly in response to the capital-raising constraints it caused, MGPA has sought alternative funding sources. These have included a Spezialfond to provide German institutions a familiar investment structure to access Asian real estate, a vehicle that has attracted €135 million in equity so far. The firm also has a sub-advisory agreement with Orlando-based CNL Financial Group to invest retail capital into its markets. 

“MGPA has a very entrepreneurial and creative team that will continue to deliver results for investors,” Chandler says. Furthermore, although now is not the time for announcing new initiatives, he insists that “plugging” the MGPA investment teams into BlackRock will herald new strategies in time. 

Buying MGPA brings opportunistic real estate platforms in Asia and Europe that are complementary to BlackRock’s existing business. The majority of the asset manager’s property book is core US real estate, along with two separate accounts and one commingled fund doing opportunistic real estate deals stateside. In addition, BlackRock committed approximately $800 million to develop apartments last year and expects to invest more in the future.  

“We’ve raised most of our opportunistic money through large segregated mandates and via existing relationships, not commingled funds,” says Chandler. “There remain opportunities in the US, and this merger doesn’t change that.” 

Could a further corporate real estate acquisition by BlackRock be in the offing for the US? Chandler doesn’t think so. “We’ve looked at a lot of US businesses and, frankly, most aren’t that interesting,” he says. However, joint ventures with other US investment managers are possible in certain circumstances. 

Indeed, BlackRock is in one venture for a fund dedicated to distressed suburban office buildings. “We’re looking at a couple of other situations where we might partner with a team that specializes in things we don’t do, but to add a business just to add scale is not interesting,” Chandler says. “We get scale organically.”

More than a teaser

It might seem surprising to some that BlackRock Real Estate, which sits within BlackRock’s $108 billion alternatives division, BlackRock Alternative Investors, had not scaled up sooner, particularly when you consider how many of the sector’s largest businesses have vacated the space. In recent years, the real estate investment management platforms of ING Group, Bank of America Merrill Lynch, American International Group and Citigroup have been sold. Others like Deutsche Bank’s RREEF were almost sold, while AREA Property Partners was acquired last month by Ares Management, another group keen to make its mark in the market. 

Chandler says, in the two years since he arrived from LaSalle Investment Management, he has been inundated with corporate proposals. “In the past two years, I’ve met with probably 50 firms interested in a strategic partnership, being acquired, having someone raise capital for them or even having someone bail them out. MGPA was the first firm where we read more than a teaser, as they bring best-in-class investment teams, capabilities and a track record to BlackRock’s platform.”

BlackRock was contacted last year about buying MGPA by Berkshire Capital after MGPA appointed the boutique investment bank to draw up a list of potential acquirers. Quille says the appointment actually was instigated after MGPA received an unsolicited takeover bid from an unnamed UK institution, although that bid coincided with the ongoing internal deliberation about how to expand the business. 

MGPA also considered buying other platforms but, like BlackRock, concluded many were ‘broken’. “They would have given us more problems than added value,” Quille adds.

“We discussed what an ideal partner would look like,” recalls Quille. “It needed to be an asset manager with a fiduciary culture, one that clearly saw real estate as part of its portfolio and that had a balance sheet enabling us to grow. Given the complementary nature of BlackRock’s existing real estate investment solutions, the transaction was an obvious fit for both sides, enhancing the ability of each to offer clients an unrivaled set of real estate solutions.”

BlackRock was not the only name on Berkshire’s 18-strong initial list. Indeed, MassMutual Financial Group, the US insurance giant and owner of real estate investment management platform Cornerstone Real Estate Advisors, was another business to have engaged in negotiations. Quille would not discuss BlackRock’s competition, but he adds: “We got the outcome we wanted for our people and our investors.”

Mark Burton, formerly chief investment officer at the Abu Dhabi Investment Authority and the Abu Dhabi Investment Council, is one investor to have committed equity to MGPA on different occasions, and he thinks the acquisition by BlackRock should be broadly welcomed. “It’s a good solution for BlackRock because their European platform is small and they have no Asia platform,” he says. “It’s very good news for MGPA because it provides a source of funding and a distribution outlet to replace Macquarie. I think the MGPA business remains one of the best in their regions so, to me, it’s a no brainer.”

What MGPA’s other investors think about the deal will become clearer to Quille and Chandler during the firm’s annual investor meetings. Still, with such an endorsement, the pair should be relaxed about those meetings, even if they feel obligated to dress more formally for the occasion. 


A matter of cost
Private equity real estate platforms no longer command the premiums they once did before the global financial crisis 

Neither firm would divulge how much BlackRock is paying for MGPA. However, what PERE does know is that private equity real estate businesses do not cost what they might have before the global financial crisis started in earnest in 2008. 

Prior to the crisis, platforms changing hands for as much as 14 times a firm’s earnings before interest, tax, depreciation and amortization (EBITDA), or for a high single-digit percentage of a firm’s assets under management (AUM), were not uncommon. Today, a sale still might be conducted using either a multiple of EBITDA or AUM as a guide, although it likely would not include a forward earnings projection in the calculation as might have occurred before, one PERE source notes.

In recent news reports, the Australian Financial Review estimated that MGPA was being offered for more than A$200 million (€153.7 million; $197.6 million), while UK commercial property magazine Property Week suggested the price was closer to A$140 million. Whatever the reality, the sale price will be less than it once could have been.


The third party  
Macquarie has held large positions in real estate platforms over recent years, but it is a ‘willing seller’ of MGPA

Although it was a silent partner, as the majority stakeholder with 56 percent, Australia’s Macquarie Group could have made life difficult for MGPA after the firm’s management decided to market the business for sale.

Fortunately for all concerned, Macquarie, which originally backed the spinout by Quille and his colleagues in 2004, actually was happy to exit. Quille recalls: “As we went through our strategic review process, Macquarie said ‘If someone comes along, we are a willing seller. We’ll go with you’.”

When MGPA was formed (as Macquarie Global Property Advisors), the bank held a large real estate exposure generally, but it has since become a net seller in the space – even though it was believed to have thrown its hat into the ring to buy Citi Property Investors in 2010 and RREEF last year.  Nonetheless, one PERE source explains that the latter situation was more an exploratory exercise than a solid effort to build a real estate investment platform.

At the time of its sale, MGPA was held within the Macquarie Infrastructure and Real Assets unit of Macquarie Funds Group, a division which boasts A$337 billion in assets.