After months of speculation, Baltimore-based global asset management firm Legg Mason announced last month that it had agreed to buy a majority stake in Clarion Partners for $585 million. But while the New York-based Clarion is one of the most recognizable names among US real estate managers, most people in the private real estate industry knew little about its buyer.
One of the few aspects well-known about Legg Mason was its quest to regain a foothold in private real estate after a seven-year absence. The company – which also invests in fixed income, equity, liquidity and alternative asset classes – previously was active in the space through its real estate investment arm, Legg Mason Real Estate Investors (LMREI), which it formed in 2000 and owned until 2010, when LMREI was spun out of the company through a management buyout and subsequently renamed Latitude Management Real Estate Investors.
“It was a small non-core business at the time. It wasn’t of scale,” said a Legg Mason spokeswoman of the platform. “We are in a different position today and Clarion is much larger.”
While Legg Mason declined to elaborate on the size of LMREI at the time of its sale, Clarion is one of the largest US real estate investment management firms, with approximately $40 billion of assets under management as of December 31.
“Legg Mason had seen a lot of potential acquisitions in the real estate business, but none that came close to Clarion,” in terms of the quality of its management, assets, performance and the diversification of its client base, the person said. “Companies like Clarion don’t become available very often.”
As for Clarion, the real estate investment manager was seeking a different type of majority owner after 12 years with Dutch financial group ING Groep and five years with its current parent company, New York-based private equity firm Lightyear Capital. ING was forced by regulators to sell Clarion after suffering heavy losses on its property loans during the global financial crisis, while Lightyear was said to be seeking to harvest its four-year investment in Clarion as it prepared to launch its next private equity fund. With that kind of ownership history, Clarion “wanted to have a permanent home,” said one person familiar with the deal.
Indeed, Clarion’s ownership by Lightyear was “by nature a transitional structure,” said Hugh Macdonnell, managing director at the real estate investment manager. “Legg Mason will be for us a forever structure.”
Part of Legg Mason’s appeal for Clarion is understood to be its independent investment affiliate model, where each of its underlying businesses operates with a high degree of autonomy. After the close of the acquisition, which is expected during the second quarter, Clarion will become Legg Mason’s primary real estate independent affiliate, and its ninth underlying business.
Under the asset manager, Clarion’s management team also would be able to maintain its stake in the company at approximately 20 percent, similar to its percentage stake under Lightyear. However, given the growth of Clarion’s assets under management over the past four years, the firm’s management is now said to be investing $125 million in the business, as compared to just $25 million in 2011.
PERE understands the Clarion acquisition was orchestrated as a result of two different circumstances coming together: Lightyear’s decision in mid-2015 to liquidate its investment in Clarion and Legg Mason’s search for a real estate investment affiliate. While the names of other firms were floated as potential bidders, Legg Mason made a strong proposal early in the process. “They had a pole position at a minimum,” said the person close to Legg Mason.
In the short term, Clarion is said to be exploring a return to the real estate securities business – seven years after ING Clarion Securities was sold to CBRE – and is likely to leverage its relationship with its publicly-traded parent company to do so. Longer-term, the company also is understood to be interested in potentially expanding its geographic presence under Legg Mason.
Meanwhile, Legg Mason's main objective as Clarion's new owner is to support and help it grow. As one industry observer noted about the real estate firm: If it ain't broke, don't fix it.