The dictionary defines ‘influence’ as “the capacity or power of persons or things to be a compelling force or produce effects on the actions, behaviour and opinions of others.” While the definition seems clear enough, the trick comes in applying it to private equity real estate. For example, how would one define ‘most influential’ in the sector?
Well, this month, PERE has had a stab at answering that question with a feature highlighting 10 of the most influential people in private equity real estate today. On the following pages, one can find the result of hours of fun turning over various suggestions and ideas about who influences the private property markets the most.
First, the usual disclaimer. This list has been informed by suggestions from knowledgeable market participants, but ultimately the PERE edit-orial team made the final decisions. So, blame us if you take issue with any of them. Indeed, we would encourage you to go a step further and drop us a line to tell us who would have been better placed on the list and, more importantly, why. We would love to hear from you.
We won’t pretend it is has been an easy task. For example, there is an obvious omission from the list of 10 in that not one of the entries represents a sovereign wealth fund. How can that be? Our position on that ultimately was the following: while sovereign wealth funds undeniably yield power through the purse, we believe they haven’t been truly influencing. Is Norges Bank influencing matters by splashing cash directly in core cities and assets classes around the world? Moreover, which one would you single out?
A few years ago, perhaps you might have said the Abu Dhabi Investment Authority or the Government of Singapore Investment Corporation, but things are not so clear nowadays.
As a footnote, when PERE last produced a ‘most influential’ list, it was November 2006 and the global property markets were approaching new heights. In retrospect, many of the names on that list – Tom Barrack, Wes Edens, John Grayken, Ronald Kravit, Sonny Kalsi, John Kukral, Barry Sternlicht and Sam Zell, among others – were obvious. Of course, many of these people still exert huge influence today.
This time around, however, we looked for some less obvious candidates – and fewer general partners. We placed a premium on people with a contemporary feel, not necessarily those long-standing senior fund managers that have had influence over an extended period of time, important as they are. Some people are on the list because of influence over recent regulation – that’s new. Others are there because they persuade others to act in a certain way or are thought leaders.
In the end, this list hopefully provides a snapshot of time. If one thinks about the big trends that have taken place over the past year or so and the big decisions being taken today, we feel sure the 10 people named here have played a part in influencing them.
The global real estate team
The Blackstone Group
A list of ‘most influential’ private equity real estate players would not be complete without The Blackstone Group. The presence of the team is down to the influence it has over all segments and geographies, including debt and equity investing in the US, Europe and Asia, and across all property types. “How could they not be on the list?” asks one industry participant.
Indeed, we at PERE can attest to the influence that Blackstone’s real estate team has, as we have learned from experience that news articles with Blackstone in the headline attract big hits from readers of perenews.com without fail. There is inside joke here that Blackstone could sneeze and it still would get thousands of clicks.
Blackstone’s quarterly earnings calls are a particular in-house favourite. When Hamilton ‘Tony’ James, the firm’s chief operating officer, or co-founder Stephen Schwarzman take to the phone, they can nearly always be relied upon to deliver killer quotes. Who can forget April 2012, when James said of Blackstone: “I don’t consider us a private equity firm. To say that we’re a private equity firm just isn’t right. Call us a real estate firm if you want; that’ll be closer to the truth. That’s our biggest business.”
As for the selection of the entire team rather than an individual, such as global head Jonathan Gray, Blackstone insists there is no single influencer upon the team either internally or externally. It points out that, at its weekly meetings, the real estate team forms a consensus on its buy and sell decisions after discussing the current portfolio and all new opportunities. Seems simple enough.
Securities and Exchange Commission
When David Blass speaks, people in the private equity and real estate industries listen. As chief counsel of the Securities and Exchange Commission’s Division of Trading and Markets, Blass commands the attention of every private fund sponsor – or at least every sponsor’s legal advisor – with his focus on fund marketing practices.
Consider the legal world’s reaction to an address that the SEC attorney gave in April about potential
violations by private fund sponsors of the SEC’s broker-dealer registration requirements. The speech went on to spawn hundreds of thousands of updates from law firms everywhere, urging private fund sponsors to carefully review their solicitation activities, including the use of outside firms or internal personnel to market fund interests, to determine whether or not they need to register as broker-dealers with the SEC.
“Private fund advisors may not be fully aware of all of the activities that could be viewed as soliciting securities transactions, or the implications of compensation methods that are transaction-based,” Blass warned in his speech. He went on to cite the SEC’s enforcement action against New York-based private equity real estate firm Ranieri Partners one month prior as a consequence of a sponsor’s failure to use a registered broker-dealer.
The broker-dealer issue is far from the only regulatory area where Blass has had an impact on the industry. He has acknowledged that the “safe harbor” rules currently available for fund managers wishing to offer and sell interests in the funds they advise may be inadequate for today’s market, and he can be expected to lead the SEC’s efforts to update those regulations as well.
European Securities and Markets Authority
There have been many hands involved in Europe’s Alternative Investment Fund Managers Directive (AIFMD) from the kernel of an idea at the European Commission to full implementation on July 22. Now, it is up to local regulators in each country to approve applications from firms to become AIFMs. Rather than list the individuals responsible at each regulator, who is it that oversees them? In other words, who regulates the regulators?
Step forward Laurent Degabriel, head of the investment and reporting division at the European Securities and Markets Authority (ESMA), which was set up in 2011 to reinforce protection for investors and stability of financial markets. The gravelly-voiced Degabriel is a former financial expert from the European Commission who joined ESMA the year it was established and set about advising how the legislation should be drafted and implemented.
Under the watchful eye of Degabriel – and with input from senior officer for investment management Richard Stobo – ESMA finally submitted its influential advice complete with impact assessment back to the Commission in November 2011. The Commission then formed the Directive, hence affecting thousands of general partners and would-be fund managers.
Now, Degabriel and the staff he oversees are making sure things work the way in which they were meant. Of course, his influence doesn’t begin and end with AIFMD. His scope also stretches to Solvency II, the European Market Infrastructure Regulation and, most recently, the European Commission’s
focus on the shadow banking system.
The Townsend Group
The Townsend Group is unquestionably one of the most powerful global advisory businesses around. With more than 90 clients, most public US pensions, the firm started by Terry Ahern and Kevin Lynch in 1983 has a welter of limited partners that follow its advice. On a day-to-day basis, that advice often is imparted by principal Anthony Frammartino, the primary senior relationship manager and portfolio manager to discretionary clients of the firm.
True, Townsend is often viewed with a mixture of admiration, suspicion and a little bit of fear as some people say it “can make or break a firm.” Still, those that know Frammartino point out that is not the reason he is so influential. Rather, it is because he “thinks outside the box,” as one industry source puts it. “He always explores new ways to make money for clients and, at the same time, mitigates risk.”
According to those that know him, it is the creative structuring of co-investments and club transactions, as well as the negotiation of corporate governance provisions and fair and reasonable fee structures, that makes Frammartino stand out. “He sees things from a different perspective,” another source adds.
Just ask the National Pension Service of Korea. Frammartino was instrumental in implementing its program in special situations. Of course, plenty of other major investors have had their wishes in global property fulfilled by the unassuming graduate of Case Western Reserve University.
APG Asset Management
You know someone wields a large amount of power and influence when people grumble behind their back but aren’t brave enough to openly criticize them. Such is the case among some members of the Association for Investors in Non-Listed Real Estate Vehicles (INREV), where Patrick Kanters was elected chairman in April 2012. Some members (typically GPs) have been known to privately question why the head of an organization that at times has seemed ‘anti-funds’ should be representing all investors, large and small?
At INREV, Kanters and his employer, APG Asset Management, can influence the requirements, standards, fee structures and so on expected of GPs. To be fair, though, Kanters has a track record of being a stickler for corporate governance, transparency and good fund manager etiquette outside INREV too. For example, it was
Kanters’ objection to share performance, strategy and governance at ProLogis European Properties in 2011that forced ProLogis to ultimately take it over after a public spat.
Since then, Kanters has not only influenced matters through words but action as well. He has led the APG real estate team into large direct deals around the world, although it also continues to invest in traditional real estate funds, somewhat undermining the complaint that APG shouldn’t have such influence at INREV.
In typically Dutch style, APG would say that there is no single person in particular that holds sway over its actions in the market. There are 35 people in the real estate team whose opinions are formed by all manner of information. That said, as head of the team, Kanters can rightly be said to be the place where things get decided.
If it’s a major private equity real estate transaction, chances are Mark Myers is involved in it. After all, Myers is head of commercial real estate at Wells Fargo, the largest commercial property lender in the world currently, with $63.8 billion in commercial real estate originations last year including approximately $23.9 billion in new commitments. Of that $23.9 billion, approximately 30 percent to 35 percent of the transactions involved borrowing entities that partnered with or were controlled by private equity real estate funds.
As the go-to bank, Wells Fargo is considered a “dominant force” in private equity real estate, providing the lion’s share of capital for deals by heavyweights such as The Blackstone Group and Lone Star Funds, according to one industry player. Myers, meanwhile, is responsible for the bank’s commercial real estate strategy, which typically is to partner with private equity firms to buy pools of loans and retain the better-performing ones for its own balance sheet. The bank, in turn, serves as the lender for those transactions.
A recent example of this strategy in action was Wells Fargo’s July acquisition of Hypothekenbank Frankfurt’s £4 billion (€5 billion; $6.05 billion) UK commercial real estate loan portfolio from Commerzbank. While Wells Fargo bought the larger tranche of performing loans, Lone Star acquired approximately £1.3 billion in nonperforming assets, with the bank providing the necessary financing. The deal also represented the bank’s continued expansion in the UK commercial real estate market, where it began lending just last year.
ORG Portfolio Management
Investors may write the checks, but consultants often help to determine the recipients. As co-founder of ORG Portfolio Management, Schwartz is a particularly impactful example because of his early support for what have become increasingly popular real estate investment strategies.
“What we did is we challenged the conventional wisdom of what core is,” says Schwartz. In looking at core open-ended funds, “we saw that they did not perform to expectations in terms of risk, return and liquidity.”
Instead, ORG expanded its definition of core real estate to include alternative real estate, secondary markets and property debt. Subsequently, the firm’s clients have become seed investors in funds such as Mesa West
Capital’s Mesa West Core Lending Fund and Harrison Street Real Estate Capital’s Harrison Street Core Property
Fund, which is focused on stabilized, income-producing education, healthcare and storage properties.
Such strategies have yielded returns that are, on average, 100 to 200 basis points higher than the typical core returns of 7 percent to 8 percent, leading many others to take note. “The big change is it’s becoming more and more widely accepted,” Schwartz says of the approach. “More and more funds are getting started, and even some of the larger funds are going into these sectors as they recognize the risk-
Global Logistic Properties
He might have sensitive dietary requirements but, apart from that, there is not much weak about Jeffrey Schwartz, particularly his influence over the global logistics market. The former ProLogis boss nowadays is building up his own powerhouse, Global Logistic Properties, and one only has to take a look at his capital partners to see his clout. He has long-term relationships with the Government of Singapore Investment Corporation (GIC), the Canada Pension Plan Investment Board and China Investment Corporation, all of which tend to follow his investment ideas around the globe.
Seek Ngee Huat, former president of GIC Real Estate, first met a young Schwartz in the late 1990s. “He struck me as a driven and intense young man, and he was doing such a good job,” he recalls. “He gives lots of personal attention to his relationships.”
It seems reputation – and the forces that can enhance or diminish it – matter greatly. Schwartz notes that the best advice ever given to him in business came from former partner Elmer Krauss. “He really stressed on me that reputation is the greatest asset you ever have, and nothing is ever worth even taking a 0.1 percent risk to your reputation,” he says.
New Jersey Division of Investment
During his three-year tenure as the head of investments for one of the largest US pension plans, Timothy Walsh has shown a knack for executing unconventional, high-profile deals. There was, of course, the $1.5 billion strategic partnership that the New Jersey Division of Investment (NJ DOI) formed with The Blackstone Group in 2012. Still, what really made a splash in the private equity real estate industry was its blockbuster sale this year of nearly $1 billion in real estate fund interests to a partnership between NorthStar Realty Finance and Goldman Sachs Asset Management, shattering the traditional model of a real estate secondaries transaction.
NJ DOI also has been a trailblazer as a large first-closer, most notably through its $500 million commitment to Blackstone Real Estate Partners Asia in March. In exchange for its massive investment, the state pension secured a fee of approximately 76 basis points on committed capital – one of the most favorable terms Blackstone has ever granted to an investor, and something many have taken note of.
Walsh’s influence has not gone unnoticed in the industry either. In fact, Hong Kong-based Gaw Capital Partners was so impressed that they hired him to help build up their North America business, beginning this month.
NorthStar Realty Finance
Perhaps no firm has done more than NorthStar Realty Finance in shaking up the real estate secondaries market over the past year. Under the leadership of Albert Tylis, the commercial real estate investment and asset manager has been helping to lead a shift in the market, where non-traditional buyers – those firms that aren’t dedicated to buying fund interests – are paying for stakes at near-par prices and becoming increasingly active players.
NorthStar first broke onto the real estate secondaries scene in December, when the firm agreed to acquire majority stakes in 45 fund interests valued at approximately $765 million from financial services organization TIAA-CREF. The $390 million transaction was one of the first major deals in the market that didn’t involve a traditional secondaries firm.
However, it was NorthStar’s agreement in June to purchase nearly $1 billion in real estate fund interests from New Jersey that was even more notable. The $925 million deal, which the firm struck in partnership with Goldman Sachs Asset Management, represented one of the largest property fund portfolios to ever trade and involved buying all of the fund interests in full.
Analysts say that the publicly-traded firm, which is best known as a commercial real estate lender, is expanding into real estate secondaries to broaden its property exposure and to diversify its revenue streams. With its ability to outbid rivals, which is attributed to the upside potential the firm projects for many of the interests it buys, NorthStar is just getting started.
Teacher Retirement System of Texas
As head of the $117.5 billion pension plan’s $1.6 billion real estate emerging manager program, Bernstein has been one of the most public supporters of up-and-coming managers in the industry. This assertion is backed not only by its emerging realty manager program but also by the conference it co-hosts on behalf of such firms.
Makena Capital Management
As managing director at the Menlo Park, California-based firm, Meaney has built a reputation as an investor who not afraid to challenge general partners on their assumptions. A manager of fund of funds for endowment and foundation clients, she has become a force on behalf of such investors with respect to fund and fee structures.
National Asset Management Agency
McDonagh, dubbed a safe pair of hands and a very capable civil servant, was appointed chief executive officer of
Ireland’s ‘bad bank’ when it was set up in 2009. Since then, other countries have taken lessons from his experience in terms of what to do and what not to do, including Spain’s Sareb.