EUROZONE: Monkey in the middle

Last month, PERE referred to Stealers Wheel’s hit “Stuck in the Middle with You” to describe the predicament of a certain size of manager that is neither sufficiently large nor targeted to totally prosper nowadays. We were referring to the takeovers of MGPA and AREA Property Partners by BlackRock and Ares Management, respectively, but now a third example can be added – that of Henderson Global Investors.

Henderson has agreed to sell a 60 percent stake in its European and Asian business and 100 percent of its North American business to New York-based financial services giant TIAA-CREF in order to create a new venture, TIAA Henderson Global Real Estate. Yet again, it appears to be a case of being stuck between a rock and a hard place.

Henderson, which employs 200 people and manages £12.7 billion (€14.9 billion; $19.8 billion) of assets mainly in Europe and Asia, is larger than MGPA, which has $11 billion of assets and 240 people, and AREA, which has around $6 billion under management. Nevertheless, it is challenged by the same fundamental issue that has been facing the other two firms – namely how to grow a successful global franchise in every region.

It is no secret that Henderson is an investment management business with a limited balance sheet from which to commit large equity co-investment into funds or for direct property deals alongside clients. This has placed it at a disadvantage in recent years, during which investors have demanded closer alignment from fund managers. Increasing regulation and the implications for capital adequacy make the outlook even tougher for managers looking for growth, especially those lacking the access to their own source of equity. As a result, Henderson felt it needed a strong financial partner, hence the corporate tie-up with TIAA-CREF materialized.

Size clearly has been an issue playing on the minds of the senior management at Henderson. Andrew Formica, chief executive of the London-based group, said the firm had long recognized that its property business would benefit from greater scale and access to capital to accelerate its future growth. In order to do this, however, Henderson has had to go back a step.

Both TIAA-CREF and Henderson are keen to stress that TIAA-CREF North America and the new TIAA Henderson Global Real Estate will work closely together as one “seamless” global organization managing a combined $63 billion of assets, thereby creating a new “leader” in real estate investment management. To be fair, though, Henderson is no longer master of its own destiny as TIAA-CREF holds the majority interest in the new venture and more seats on the board. Just like in the cases of AREA and MGPA, Henderson has had to relinquish independence in an apparent bid to expand.

There appear to be other similarities as well, at least with the AREA takeover. Lee Neibart, chief executive office at AREA, told PERE recently it never put a “for sale” sign up outside its door. On a call with reporters on the day the transaction was signed, TIAA-CREF’s head of global real estate, Tom Garbutt, also gave the distinct impression this was the case with Henderson and that the transaction was the result of long-standing acquaintance and talks going back 18 months.

The Henderson transaction was announced just 24 hours before PERE went to press, so it has not possible to gauge investor reaction yet. Apparently, the firms’ investors learned of the formation of the new real estate investment management venture at 7:15 am on the morning of the announcement. However, James Darkins, the boss of Henderson’s direct real estate division, said he has received favorable comments.

There certainly doesn’t seem to be much to dislike in terms of overlap between Henderson and TIAA-CREF’s client base, which is surprising given Henderson has something like 350 investors. According to Darkins, only a dozen or so clients overlap, such as Australia’s Future Fund, which does bode well. There is not much overlap between staff either.

One could think of TIAA Henderson Global Real Estate as a captive core and value-added investment manager in Europe and Asia for TIAA-CREF. The new venture will have the exclusive rights to offer direct property and property debt investments, with TIAA-CREF investing $1.5 billion in Europe and Asia over the next few years. The new venture also plans to launch a new business in commercial real estate debt that would include co-investment from TIAA-CREF.

The advantage to Henderson and its clients is access to deal flow, firepower in all three regions and, of course, access to TIAA-CREF’s client capital. Still, for all the logic of the tie-up and potential to grow, there unquestionably was the need to do something. We certainly wish the Henderson and TIAA-CREF real estate teams all the best and good luck with this exciting new venture.