How long would it take to grow a real estate investment management business on the scale of CBRE Global Investors or LaSalle Investment Management, from a standing start?
Perhaps as long as 20 years, assuming you could suck up the losses in the early years, attract and retain talent and assuming you are supported by very patient shareholders.
Well, playing the long game is not on the mind of Brett White, executive chairman of DTZ, which last month made public it was taking over Cushman & Wakefield to create a huge new global services firm with 55,000 staff.
The deal instantly puts the firm in the same league as CBRE and LaSalle in the brokerage stakes. But what is of more interest to the readers of PERE is that White wants to create an investment management business of an adequate size to compliment the brokers.
Everybody knows White moves big when he can. As chief executive officer of CBRE, he was the driving force behind the $1 billion takeover of ING Real Estate Investment Management (ING REIM) in 2011 that catapulted CBRE Global Investors to becoming the largest real estate investment manager in the world with over $90 billion of assets. What are the chances of that happening again, and by when?
First of all, let us be clear. You have to assume that the overall plan by TPG Capital, which bought DTZ last year, is to roll it up with Cushman and eventually take it to the public market. Now, it can do that as a pure property services firm mixed in with low margin property management work, no question. Bear in mind that for CBRE and Jones Lang LaSalle, the owner of LaSalle, some 80 percent to 90 percent of underlying profits come from their core business, so that is where the majority of value lies. But in an ideal world, White and the group's private equity backers would like to have a big investment management business bolted on to make it an even more valuable proposition.
The allure of investment management is that, if successful, the margins are so much higher than in property services, and less volatile given the recurring nature of management fees. The range of margin can be from 20 percent to 25 percent on the lower end of a spectrum that can top up higher in stellar years all the way to 40 percent for certain of the most streamlined, most profitable businesses.
At the same time, the core brokerage group can benefit directly from having an affiliate investment manager if the investment manager is encouraged to put disproportionate work the way of the brokerage. This is not for everyone as it raises question marks about whether investors appreciate such a set up. Note that LaSalle does not have such an arrangement preferring to spread the work around instead. But White at CBRE leant towards the first model, which does lend itself to quicker gains in the short-term even if it might ruffle feathers among some investors.
So there is good reason for a brokerage to add investment management. But what are the chances of doing something big? At the moment, there is no large scale investment management business at a merged DTZ/Cushman & Wakefield. So the game plan must be to find a major acquisition. This is the element of the plan that will separate the men from the boys, or to put it a completely different way, could prove to be the biggest risk and challenge.
Need it be said that an enormous amount of time, effort and skill is required to integrate businesses the size of DTZ and Cushman & Wakefield. To execute a takeover of an investment manager so soon after a lot of internal distraction will require a herculean effort and the right person in charge.
Okay, so the company's private equity backers might not expect an immediate deal, but the investment time horizon certainly puts pressure upon the franchise to do something sooner rather than later. Which takes us to the next question. Is there any platform out there up for sale that can move the dial? Well, the short answer to that is, 'no'. However, the big boys in this industry are no fools. White, the management of LaSalle and the other big boys have already run the slide rule over the largest real estate investment managers out there and worked out which ones have owners that are not natural owners of such businesses and therefore have shareholders that might want out soon.
The answer to the question is there may be one or two mid-market platforms in the $15 billion to $30 billion assets under management range that could well become available within the next 12 months to 36 months.
My bet is that will happen. But I bet also that there will be more than just this new DTZ-Cushman group looking to buy.