BlackRock is not big enough. For a global asset management behemoth, that statement would seem ridiculous. After all, take a look at the stats: assets under management, $4.52 trillion; employees: 12,000-plus; offices: 70-plus in 30 countries; investment teams: 135-plus; portfolios managed: 7,700-plus. Name another financial organization with that kind of heft and footprint.
Still, the statement does hold for BlackRock in terms of real estate – or at least it did until last year when a significant event occurred. After considering ways to expand its footprint, BlackRock took over MGPA, the pan-Asia and Europe group managing opportunistic real estate funds. Suddenly, it went from a small operation to 400 staff.
At the time, BlackRock primarily was known in real estate as having core and core-plus real estate capability and most people were aware it was on the hunt for an acquisition. At the same time, Singapore- and London-based MGPA was looking for someone to buy it. BlackRock believed it made sense to be the acquirer and MGPA liked the offer, and today the leaders of the new-look entity are glued to making it work.
“This is the culmination of two years of strategic plan with BlackRock’s legacy business,” says Jack Chandler, chairman of the real estate group. “We are positioning ourselves to be in all four quadrants of the real estate universe.”
Today, standing under the famous BlackRock corporate signage at offices in Manhattan, Chandler is accompanied by the two other senior managers primarily responsible for making the merger successful and delivering a full service to clients. If things go well, BlackRock will forever sweep away a sense that the firm is underweight in real estate for its size and the team is hard at work ensuring that this is really the beginning of something big.
Chandler, along with Marcus Sperber and Simon Treacy – global head, and global chief investment officer respectively – are fully aware that a year has gone by since the merger with MGPA, and they report the progress on integration so far has been good.
Plus, behind the scenes, various initiatives are underway including formulating new products and investment strategies which the market is curious to know about. As one manager of a rival asset management firm said: “The purchase of MGPA was a good one – just need to see the fruits of the merger come to the fore.”
It was precisely on October 7, 2013 that BlackRock completed the acquisition of MGPA to create a $23.5 billion real estate investment platform serving an investor base of around 700. Since the acquisition, BlackRock’s senior real estate management team has been full-on integrating the combined platform that grew to 400 on-the-ground real estate professionals across 18 offices in 13 countries.
At the time of the merger, it may not have been a material transaction to BlackRock’s earnings per share, however it was certainly significant to Chandler and the wider market. It underlined the support BlackRock was giving to Chandler to deliver on a mission to provide a real estate platform befitting the firm’s name and size. Chandler had been selected by the company in April 2011 as its new head of global real estate having been with Chicago-based LaSalle Investment Management for many years, more recently as global chief investment officer and executive chairman for Asia Pacific. Once at BlackRock, he took on the mantle of global head of real estate as well as a member of BlackRock’s Alternative Investment Executive and Investment Committees plus the firm’s global operating committee.
Meanwhile, Treacy was group chief executive officer over at MGPA and Sperber was in London working at BlackRock as head of its EMEA real estate business.
The general perception among those in the global private equity real estate industry is that something had to happen for MGPA to continue to grow and for BlackRock as a firm without a complete offering. Sperber provides an honest appraisal when asked how people on the outside used to look at BlackRock Real Estate. “We were seen as a core manager – a very big asset manager with a small shop. We were shockingly small.” However, he adds: “Our clients now see us very differently.”
Most people in the private equity industry also believe the merger has gone well so far and it may not be a surprise to hear that the BlackRock team agrees. But it genuinely seems to be the case. “As we worked through the merger, the process has gone even better than we hoped,” says Chandler. “It’s about the combination of people and also investors and consultants that look upon this as creating very real synergy.”
Putting together several hundred people obviously takes time and effort, but during the takeover talks MGPA was looking at BlackRock’s culture as much as BlackRock was looking at MGPA’s culture to measure how snug the fit would be.
Treacy, who relocated to New York after the merger to become global chief investment officer, says: “One of the things we were looking at during the process of selling MGPA was whether BlackRock had an investment banking culture, because we had a founders’ culture at MGPA. We found that BlackRock still has this founders’ culture. They care. It is amazing. We are a little company compared to BlackRock but our people have really felt that connection. That is a subtle part of the DNA.”
It seems that one of the ingredients about the new platform that the managers are proud of is that professionals around the business have been able to work together without “angst”. The senior managers had decided early on that the company needed to be ‘agnostic’ about where people came from. Since the merger, plenty of work has taken place to put people in the “right positions”.
In the first instance, one of the top priorities was to make sure there was no interruption to the management of funds and assets. So, people were kept in situ. That said, it also moved others around to ensure that staff members felt motivated with some headroom for growth. The most overlap was in Europe, which is where people left the business – but that was the special sauce of the merger – there wasn’t much overlap to be found across the business in the first place.
The three leaders like to say that clients would be hard pushed to tell a former MGPA staff member from a legacy BlackRock one. “I think that creates a real credibility with people. We just don’t feel a lot of legacy angst with us guys and those guys,” says Chandler.
It is not a small mission that this group has. The firm wants to be the world’s most respected real estate manager, period. And the things that BlackRock cares about include being able to offer a wider array of real estate investing expertise. According to them, they have been busy integrating the real estate team much more within BlackRock. As Sperber explains, this is “because there is much we can do whether that is in private equity, public equity, private debt or public debt. We have people within BlackRock that understand the wider macro markets much better than we necessarily do and we can leverage off that.”
Feeding into that desire to provide various services is better research capability. BlackRock’s ability to really go “uptown” in terms of much more thoughtful research and access to risk quantitative analysis that BlackRock offers is a big plus says Chandler. “It is a very different value proposition now when we talk to clients.”
In 2011, BlackRock decided as a group to launch the BlackRock Investment Institute, which is meant to be an area where portfolio managers can be kept abreast of important macro and global trends. Its first move was launch a Sovereign Risk Index identifying countries sovereign credit risk. Treacy has been working alongside the institute since joining to add his input. Poses Chandler: “We can start to say how we are leveraging demographics and the emerging middle classes, for example, not only across markets but across the listed and unlisted sector. If the CMBS B piece market is starting to get really tight, and the credit quality is starting to deteriorate, we can analyze that to see if that is the proverbial canary in the coalmine. Is it the signal to the equity guys as to what is coming?”
However, one thing the merger is not necessarily about is adding too many more clients at this point as BlackRock has just about every global investor as a client somewhere in the world. To date, this has been a big part of the puzzlement in the industry as to why the firm was small compared to others given its undoubted relationships as a money manager. Indeed, an insight into those relationships was given by chance on the day PERE went into BlackRock’s offices to meet the real estate team. Up on one of the office levels, the company was hosting an educational week for a set of investors including sovereign wealth funds from an Asian country. Over the next couple of days, we were told the guests would be receiving many lectures from all different parts of the investment spectrum including real estate. This has been happening with investors from several different countries in turn.
BlackRock undoubtedly has a powerful client base for whom BlackRock Real Estate is looking to provide solutions. The kinds of discussion they are having with investors involve whether they want income. If so, what type of income? “We can talk to clients more holistically at a time when investors are wanting to work with fewer managers,” further explains Treacy, who later points out there are more than 500 BlackRock relationship managers around the world talking to clients.
Chandler reckons clients are not only talking about where the real estate team sees relative value plus ‘red lights’ and ‘green lights’ within the four quadrants of real estate, but what is going on in the world of alternatives in general and how it is competing with infrastructure or hedge funds or private equity.
Says Treacy: “We have gone through quite a big educational process. Bringing them up to speed on the platform and what real estate means in portfolios has been going on, which is all very timely given feedback from investors such as life insurance companies around the world saying they want to increase allocations to alternatives and in particular to real estate.”
Sperber adds: “We are a huge business and now it is about how to we make real estate user friendly for clients.” Chandler chimes: “I don’t see real estate clients as separate from BlackRock clients. We are starting to invest for clients that are asking us to do things. Clients are asking us to solve bigger, more complicated issues, be that across four quadrants of real estate, alternatives or liability matching. We end up servicing them as part of the company in alternatives and across the group. Clients – and we are seeing this a lot – are coming to us and saying here is our portfolio of assets, this is what we need over the coming 30 years, can you help us deliver a solution?’”
Right at the top of the organization from chief executive officer Larry Fink downwards, there is a belief that alternatives will grow. According to the BlackRock team there is also patience within the larger corporate entity for property to reach the stage it wants to. They say they have not been given fixed targets to grow by X percent or reach $Ybillion of assets under management or to deliver a certain profit or fee income within any fixed timeframe. Chandler explains when he arrived three years ago, the mandate was to create a “great real estate business that the smartest investors in the world would want to partner with”. He adds: “The shareholders and leaders of the business recognize that real estate is a long term game. By creating a great business, it is going to be very valuable for shareholders.”
Sperber says leaders of the whole organization are “not in a rush”. “It is about delivering what the clients need. If we do that the clients will follow and we grow the business.” He adds: “The business is not looking for us in six months’ time to hit a number. Larry Fink – I cannot underline how much support they have given, not only to support the integration but also to deliver. We have as much time as we need.”
Results have started to flow, they say. Investment performance in all the portfolios across the $24 billion assets have continued to incrementally improve. Even before BlackRock took over MGPA, there was evidence it was a trusted manager. In 2012, for example, it won a mandate to take over the management of a $543 million UK real estate fund from Deutsche Bank’s RREEF Real Estate. Since then, clearly capital has flown around the globe – perhaps too much capital for too few deals globally, admits Treacy.
On the flip side, at least BlackRock’s deal flow is actually increasingly given it now has 225 people in the three big regions. The pipeline in China where it has been investing for ten years is growing. It is not a bad time to do deals there, suggests Treacy. In Tokyo, meanwhile, the firm entered first in 2000 and recently sold two-thirds of its properties that were bought from 2010 when others thought Japan “was done”, adds Treacy. Sperber explains it has strategies for UK student accommodation and light industrial. In October, for example, it agreed a £150 million joint venture with domestic firm Canmoor to launch the BlackRock Industrial Trust as a wholly owned subsidiary of the BlackRock UK property fund.
But what the private equity real estate market is really waiting to see is how much it can expand and provide services to groups outside of the core space using MGPA’s skill set. As PERE revealed in September, the firm is talking to investors about a $1 billion Asia fund to be launched in the first quarter of 2015 followed up by a European version later in the year. The funds will be successors to MGPA Asia Fund III and MGPA Europe Fund III, but BlackRock Real Estate AF IV and EF IV are not expected to try to match the same equity raise. MGPA Asia Fund III and Europe Fund III raised a total of $5.2 billion between them upon final closing in June 2008.
The company declined to comment on specific fundraising activity but certainly investors are aware of the plans. Existing investors are also aware of a brewing situation involving MGPA Asia III. As PERE revealed last month, investors are feeling more confident about the prospects for Asia Square Towers One and Two in Singapore that constitute a $2.33 billion portion of the fund. Eventually, those two assets will be sold which could make the fund reasonably successful compared to similar vintages.
Chandler says the firm is very focused on what it calls “dislocation”. “Distress is a funny word. The UK market has seen a substantial run up in value generally especially in London offices, and yet we found student housing, high quality warehousing, and a move into secondary cities 18 months ago. So we have seen asset level, sub market level, capital market level, dislocation when we didn’t think the pricing was right. As we are looking at how to generate returns that are substantially above core, you can either put extraordinary amounts of leverage, which I think is a terrible idea, or you can figure out where you actually have a dislocation and I think people have been reminded that leverage is a two edged sword. We really push our teams at investment committee asking, ‘What’s our edge, what is the dislocation, what is the angle here where we can grow the income stream by 20 or 30 percent over a couple of years holding?’”
Sperber adds: “While we cannot talk about products, the insight we have is enabling us to have conversations about the types of returns we can deliver and whether that is in the form of a fund or strategic account, or some sort of separate account. We are looking for partnerships and to deliver that in a variety of ways.”
In the meantime, the ironic situation in a way is that while BlackRock feels it has the game now to provide investors with all sorts of investment styles, the market for the time being is strategically one to be a net seller in. In the last 12 months, the firm has looked at $135 billion worth of transactions in the three major regions. On Mondays, each region has an investment pipeline call providing BlackRock with a snapshot of capital flows. Out of the $135 billion, BlackRock has transacted $3 billion. That may be a small proportion of what it sees, but it is at least a step up markedly from what it did last year, says the team. Treacy adds BlackRock has been about one third investor and two-thirds seller.
In August this year for example, it sold the Madeleine building in Paris out of the former MGPA Europe Property Fund III to Norway’s sovereign wealth fund, the Norwegian Pension Fund Global. It sold it for €425.6 million five years after buying for € 210 million. In December 2013, it also sold Westin hotel in Singapore that is situated within Asia Square Two for around $369 million.
Interestingly, the merger has also affected the way BlackRock handles exits. Before bringing MGPA staff of board, the firm would by default just sell an asset when it reached maturity. If an asset needed redevelopment, it would have cleared it out. “Now we have the ability to do something ourselves which enables us to go right through the life cycle of assets,” says Sperber.
“It had become obvious to us prior to the merger that clients were going up the risk spectrum and we didn’t necessarily have the capabilities to do that. We had core competencies but the MGPA team has other competencies which we can take advantage of.”
Chandler adds: “It is a hard time to be an investor right now. Yields are low, people are struggling to meet their funding requirements, and most assets are fairly fully priced. I think the ability to create that incremental value with in-house teams is a great differentiator.”
Just how much investors judge the franchise to be different from other groups remains to be seen. But at least the omens look good.
Even before the merger was sealed, Sperber, Chandler and Treacy decided that to keep things in perspective they would go shooting together. The private down time reassured them that culturally they would fit. “Right after we announced this in London, we went out shooting. There were a lot of good jokes about who is a good shot!” recalls Chandler.
BlackRock Real Estate
HQ: New York
Assets under management: $23.5 billion
Key personnel: Jack Chandler, chairman; Marcus Sperber, global head; Simon Treacy, global chief investment officer