SPECIAL REPORT: Natural evolution

TIAA-CREF is taking a 60 percent stake in a new joint venture that will see the New York-based financial services group and Henderson Global Investors contribute all of their assets in Europe and Asia to create a platform with £12.7 billion 

(€14.9 billion; $19.8 billion) in assets. Separately, TIAA-CREF will buy Henderson’s US property business.
In a conference call, Tom Garbutt, TIAA-CREF’s head of global real estate, and James Darkins, managing director of Henderson’s direct property business, said the new entity would be “run in a completely integrated way, regardless of economic interests. TIAA-CREF North America and the new joint venture company, TIAA Henderson Global Real Estate, will work closely together as one seamless global real estate investment manager with a combined $63 billion” in assets under management.

The Asia-Pacific region, where Henderson and TIAA-CREF have few assets, as well as real estate debt are two key areas for growth, Garbutt and Darkins noted. TIAA-CREF already is an established lender in the US, but together they have “various debt strategies, especially in Europe.” TIAA-CREF recently made a hire in its London office to drive that business. 

Garbutt and Darkins said the new alliance would have 325 real estate professionals, or 220 excluding TIAA-CREF’s team in North America, and stressed that staff overlap was minimal.

On the call, Garbutt noted that the new alliance was about TIAA-CREF expanding its footprint and accessing new investment opportunities, while Darkins said it was about “alignment of interests, building scale and helping the business take maximum advantage of the opportunities,” plus having a “strong platform for accessing stock” and “sourcing capital.”

Darkins called the transaction “a merger of two complimentary teams” with an “excellent cultural fit.” It also was clear that the business philosophies are identical, he added, and that there was opportunity for its clients in Europe to invest in North America, where Henderson only has $2.6 billion of assets under a specialist multifamily platform, which was “not really the proposition Henderson should be offering clients.” 

Garbutt pointed out that the merger was not about size but about “value proposition” for clients. Asked whether TIAA-CREF had been looking at other platforms in addition to Henderson, he noted that the organization always looked but, in this case, TIAA-CREF and Henderson “looked at each other and realized there was a cultural fit. It was natural evolution.”

The price that TIAA-CREF is paying for its 60 percent stake in TIAA Henderson Global Real Estate is an upfront multiple of 8.8x the £21.5 million in EBITDA that Henderson’s property business earned last year, which a Henderson spokesman said compared well with precedent transactions. “Importantly, the transaction is not subject to any price adjustment mechanism at closing,” he added. 

On the decision to split the ownership of the venture in favour of TIAA-CREF, Garbutt said he thought it was a “reasonable split” given the capital commitment that his firm is expected to make. In addition to the purchase price, the firm expects to invest $1.5 billion in Europe and Asia over the next few years.

Furthermore, TIAA-CREF has the option to acquire up to another 15 percent in TIAA Henderson Global Real Estate between the third and seventh anniversary of the transaction’s completion. That investment is contingent on TIAA-CREF investing at least $1.5 billion in seed and co-investment capital in the venture before that time. 

The deal is slated to close in the first quarter of 2014, giving the new venture enough time to organize office accommodations and other infrastructure, such as IT. The two firms noted that the main issue that could derail the launch of the new business next year would be regulatory issues, although neither party expects any such problems.