BLUEPRINT: Follow the leader

In 2009, when the whisper came that the iconic Bullring Shopping Centre in Birmingham, England was available, Barry Brakey knew instinctively that it was a perfect asset for the Future Fund, Australia’s freshly-minted sovereign wealth fund. “We identified very early on that UK retail, at that time, represented excellent value,” says Brakey, who had been tapped barely one year earlier to head the Fund’s property investment team. 

The challenge for Brakey and his team was to convey their conviction to the ‘guardians of the board’ – some of Australia’s best-known business leaders, who had been charged with oversight of Future Fund on behalf of Australia’s government. “We had to demonstrate to the board the positioning of the asset at a time when it was not clear where the UK market was going,” recalls Brakey, who left a highly-successful property advisory firm, Pinnacle Property Group (which he co-founded in 1988), to join the Fund.

Ultimately, Future Fund invested £210 million to acquire a 33 percent stake in the Bullring from Land Securities, setting a record for a property transaction in the UK that year. The investment in the Bullring also represented the first property transaction by Future Fund, now approaching a total portfolio of A$100 billion and ranked as the world’s 12th largest sovereign wealth fund by the SWF Institute.

In hindsight, 2009 proved to be the trough of the UK market. Less than four years later, in May 2013, Future Fund sold its stake in the Bullring to Hammerson and the Canada Pension Plan Investment Board (CPPIB) for £307 million, achieving a handsome capital gain of £127 million.
Some might call it luck. More accurately, according to those in the industry who know Brakey, success was due to a highly astute sense of timing and value. “He has foresight and he thinks a long way ahead of the rest of the industry,” says Brett Robson, head of global real estate private capital markets at Macquarie Group.

Recycling capital  

Several key property executives, who spoke to PERE mainly on background, say Brakey and his team have been canny in their timing of asset disposals. This stems from a discipline that comes from having a finite amount of capital and the need to compete rigorously within the organization for investment funding.

“It is all about recycling capital,” says Robson. “Future Fund has to get the returns, and this requires discipline to buy well and exit well.”

Indeed, unlike Australia’s increasingly wealthy super-annuation funds, Future Fund does not have a continuous inflow of capital. Its teams of investment professionals need to work hard to compete and to recycle capital to pursue fresh opportunities.

“One positive surprise is that the Fund is prepared to sell assets,” says Kent Robbins, head of property and private markets with UniSuper, which manages in excess of A$40 billion. “The market had presumed that it would hold assets for the long term because of its long-dated liabilities.”

In many aspects, Future Fund operates differently to other sovereign wealth funds. Still, its somewhat unorthodox investment ethos is being talked about – and, in some instances, adopted – by other large institutional investors.

Brakey and his team have had to justify not just the Bullring investment, but every single property transaction, because the very concept of property investment, which requires exposure of 10 to 15 years, sets it apart from other asset classes.

The Future Fund’s property team consists of just four individuals: Brakey, Stewart Tillyard, John Longo and Matt Donzow, who was the team’s analyst until recently. It is a tight, inclusive team, according to all those who have dealt with the Fund’s property arm.

In fact, one senses Brakey’s slight discomfort that his key right-hand men – Tillyard is out on due diligence, while Longo is meeting overseas visitors – are not able to participate in this interview. Time pressures on the small team can be immense when the world of property is beating a well-trodden path to its door.

A field of foot soldiers 

Since its formation, Future Fund’s real estate team has built a global property portfolio that peaked at A$6.5 billion. As of December 31, that portfolio stood at A$5.5 billion – the smallest allocation in the Fund’s overall portfolio of A$96.6 billion.

What the team lacks in numbers is compensated for by the appointment of an impressive field of foot soldiers over different markets. Indeed, Future Fund has a dozen partners, including big names such as Brookfield Asset Management, TIAA-CREF, Henderson Global Investors and Lend Lease and small, niche players like Sydney-based CorVal Partners.

“We are very fortunate,” says Brakey. “Our reputation does mean that we have a lot of people who have very good ideas, both within and outside our sector, coming to meet and discuss those ideas. That allows us to form views on opportunities, (investment) themes and pricing.”

One source tells PERE that Future Fund’s position is clear. “It would say to each of its partners what it thinks a venture could look like when it builds out to its conclusion. It will size those (investments) according to what it thinks the opportunities are and match that with the capability of the manager.”

Rob Hattersley, chief investment officer at Lend Lease Investment Management, notes that Brakey has his door open at all times to people with ideas. Still, Brakey’s team also is hard-nosed enough to push back ideas that do not sit with its strategy.

“I put up something to the team recently, and it was frank enough to say that it did not like it but thankful that I showed it,” says Hattersley, who successfully brought an A$500 million deal to Brakey in 2009. “Barry likes to see deals brought to him in a well thought-through and executable form. Smart transactions interest the Fund, and you have to show the team a point of difference to allow the Fund to use its strength to add value.”

Partners such as Lend Lease spot opportunities, carry out the investment themes and implement business plans and strategies collaboratively with Future Fund’s highly-proactive team. For example, Brookfield delivered to the Fund an extensive spread of investments in the US through its $2.3 billion recapitalization of General Growth Properties, America’s second largest mall owner, in 2010. 

In fact, it is through General Growth that Future Fund holds a stake in Howard Hughes Corporation, a developer of multifamily assets. Separately, the Fund has forged a relationship with Boston-based Berkshire Property Advisors through a $300 million co-investment vehicle targeting the multi-family sector.

Most recently, Future Fund formed a $1 billion industrial property partnership with Dallas-based Hillwood, which is controlled by Ross Perot Jr. The venture is expected to have equity of $400 million, more than half of which has been committed, and the partners aim to buy more assets over the next four years.

A global mix 

Future Fund currently has 45 percent of its property assets, valued at around A$2.5 billion, in the US, which is the single largest geographical property exposure of the Fund. After selling the Bullring Shopping Centre, the Fund still owns logistics assets in the UK and a sprinkling of office, retail and industrial real estate in Europe. Currently, 15 percent of its property assets are located in Europe.

“We have been watching Europe fairly carefully,” Brakey says. “We have a view on pricing in different markets that make up Europe and we will execute when opportunities arise, but we are competing with a lot of local capital.”

Similarly, there is plenty of capital in Asia. Future Fund does not have direct property investments in Asia, although it has exposure to the region via the more liquid listed REIT market. 

“I feel there is a weakness in the Future Fund’s platform in that it has under-invested in core assets in Australia,” says the chief executive of a large Australian property group. “It should have acquired more assets at a time when they were quite cheap and were available.”

That chief executive, who requested anonymity, tells PERE: “If there is a criticism of Brakey’s investment strategy, it is that he focused too much on overseas opportunities to the extent that he has missed out on some of the best opportunities in Australia.”

Brakey responds: “In 2008-09, there were good opportunities in the Australian market but mostly around the recapitalization of listed REITs, which did not suit the Fund at that time. Nevertheless, there were many opportunities being presented globally that represented great relative value. For example, we felt that the US presented a lot of good opportunities and therefore we naturally concentrated on that market. If we look at the returns of what we have achieved outside Australia, I expect they would be higher than what we would have been able to achieve in Australia in the circumstances.”

A case in point is Future Fund’s co-investment with the large US financial services group TIAA-CREF. Its first joint investment – 685 Third Avenue in Manhattan – has proven to be “very fruitful,” according to Phil McAndrews, head of North America at TIAA-CREF Real Estate. Indeed, he tells PERE that the property has almost doubled in value since redevelopment, following its acquisition in 2010.

“We have an alignment of interest in terms of investment strategy and perspective on the US economy and, in particular, the New York marketplace,” McAndrews adds.

The home field advantage 

Future Fund’s current holdings in Australia, which account for 30 percent of its property portfolio, are dominated by retail assets, purely the outcome of two large acquisitions.

In 2009, the Fund joined Lend Lease to buy the A$1.4 billion ING Retail Fund. Among the 14 retail properties in that portfolio is Joondulap Shopping Centre in Perth, which is one of the best-performing centers in Australia.

UniSuper’s Robbins, one of the country’s largest investors in retail property, says: “Barry’s timing in the acquisition of Joondulap was excellent. It is the jewel in the crown.”
The ING deal was quickly followed by Future Fund’s participation with CPPIB in the A$750 million recapitalisation of a restructured wholesale retail vehicle managed by Colonial First State Asset Management.

Although retail properties have dominated Future Fund’s investments on its home turf to date, it has moved selectively into office, industrial and residential. Its entry into the office sector in 2011 came with the purchase of a 50 percent stake in Waterfront Place, a 36-level building and adjoining retail complex in Brisbane’s golden triangle. Kerr Bray, CorVal’s head of funds management, worked with Brakey’s team to acquire the asset. 

Over time, CorVal, in conjunction with Future Fund, has assessed a number of other prospective acquisitions. However, apart from the Waterfront Place, the Fund has chosen to pass on other possible acquisitions. “They are not necessarily risk-averse, but they are very focused on value and an exit strategy,” Kerr says.

Most recently, CorVal was appointed to manage the Value Active Fund, an industrial property club made up of Future Fund, Funds SA and VFMC – the latter two being the state government entities of South Australia and Victoria, respectively. The partners have committed A$200 million each to the fund and, with gearing, it will have a total investment capacity of up to A$800 million to target Australian office and industrial assets in the A$20 million to A$100 million range. The club already has acquired seven assets.

An investment manager with a state-owned super-annuation fund says: “We were looking for like-minded institutions to co-invest with us…and it was a bonus to find Future Fund.” The manager, who is unable to be quoted, finds Future Fund’s property team “well-resourced” and easy to work with. “We have intensive discussions on assets and investment opportunities,” he adds.

Meanwhile, on the residential front, Future Fund is looking to invest in the sector through Perth-based Peet Ltd, a listed residential developer.

Brendan Gore, Peet’s chief executive, was looking for a partner to explore opportunities arising as a result of strong population growth and increasing demand for affordable housing. One key criteria was an investor whose interests and long-term view were aligned with Peet and the nature of the property sector, says Gore.

At more than 50,000 residential lots, Peet already has the third largest land bank held by a public property company in Australia. The partnership could be part of 20 percent to 30 percent growth in that land bank over the next five years, Gore says. If the two partners fully capitalize the opportunities before them in the coming years, the partnership could be involved with land projects totaling A$300 million.

 Inner workings 

Future Fund was established in 2006 to help pay for future unfunded government liabilities in public sector superannuations. The Australian government seeded the sovereign wealth fund with start-up capital of A$18.5 million, which it progressively topped up over two years to A$60.5 billion. The government, however, is unlikely to put more money into the Fund, particularly given that Australia is facing growing budget deficits.

Future Fund is a lean organization, running on a full staff complement of just 95 people. That includes 45 investment professionals – a number small enough to comprise a single division in many of the large sovereign wealth funds. In contrast, each asset class at the Fund has an investment team of no more than four or five professionals.

Each investment team responsible for its own asset class competes for funds to invest in its own ideas. None of the investment teams – equities, infrastructure, private equity or property – has an allocation or weighting to geographical regions or sectors.

“We manage the portfolio as a single team, and we test opportunities across all asset classes,” says Brakey. “As such, the investment team has a good appreciation of the relative value of the opportunities relative to what else is available.”

The traditional model of institutional asset management has been to make allocations to particular asset classes. Within those asset classes, many investors then would allocate the capital to various regions on some basis. “It tends to be more structured and defined whereas, for us, it is all about the value of the investment relative to other opportunities,” says Brakey.

David Neal, chief investment officer, is credited with developing Future Fund’s investment philosophy in conjunction with the board. He proceeded to instill this philosophy in each one of his investment team members, including Brakey, as he recruited them to run the Fund’s investment portfolio.

When the property and other investment teams were created, there were no legacy or historic portfolios to manage. Each had to sketch out responsibilities and investment strategies from a blank sheet of paper, guided primarily by three simple briefs: Achieve returns of CPI plus 4.5 percent to 5.5 percent each year; Take reasonable and acceptable risks; Not influence the market, especially the smaller Australian market.

“We need to actively manage the portfolio in order to produce results that allow us to meet our mandate,” says Brakey. “The team works hard to find good entry points to quality property and to seek partners to actively manage our portfolios. Further, a well-timed exit that allows us to optimize returns also is very important. We do not regard our portfolios as ones that we set and forget.”

Working with constraints 

So far, industry observers are impressed by Brakey’s exquisite timing when it comes to trading assets. On this, he demurs slightly, but he also stresses that only time will tell how well Future Fund’s investment decisions play out.

The team’s achievements are especially laudable, observers say, considering their limitations as imposed by The Future Fund Act 2006. Under that law, the Fund cannot have a controlling interest in the assets it acquires; it must buy through a vehicle, such as a fund or a club; and it may not participate in the privatization of a listed vehicle.

Within Australian property circles, it is generally believed that Future Fund would have a lot more opportunities to buy good Australian assets if not constrained by its charter. “Our legislation requires us to invest in financial assets, and this leads us to invest in funds and trusts and vehicles, which we do not control,” Brakey explains.

In addition, unlike other investors, Future Fund does not have specific sector or geographic allocations. “We simply seek to achieve and exceed our return objectives based on the opportunity set available,” Brakey says.

As a result, the composition of the Fund’s global portfolio changes constantly. Today, retail property accounts for 45 percent, office 30 percent, industrial 10 percent, residential 5 percent and the balance in other segments. However, as its current business plan evolves, retail will shrink as more office and industrial are completed.

A sense of stewardship 

The onus to generate wealth for future generations of Australian is not insignificant. “We do have the sense of stewardship that we are doing something that is very important for the country,” Brakey tells PERE. “We think very deeply about every one of our decisions in that context.”

It is this same sense of nurturing for the future that preoccupies Brakey in his private time. Through the Property Industry Foundation (PIF), a philanthropic organization and the only non-work organization to which he belongs, he and his wife, Wendy, look to help homeless youth
After chairing PIF for several years, Brakey is about to hand the baton to another property industry elite, Daryl Browning, but not before PIF has built a six-bedroom house for the Lighthouse Foundation, which provides a home for homeless youth. “The industry chipped in, and we raised A$100,000 for the project,” he says.

The day after this interview, PIF hosted 15 lucky youngsters on some of the 44 yachts taking part in a sailing regatta in Melbourne’s Port Philip Bay to raise more money for the charity. Out on the water, Brakey is at the helm of his other life.

Future Fund

Established: 2006
Headquarters: Melbourne, Australia
Total staff: 95
Real estate staff: 4
Total assets under management: A$96.56 billion*
Total real estate assets under management:
A$5.12 billion*
*As of December 31, 201