STATESIDE: The other costs of sale

It has been hard to ignore the quick succession of Asian investors buying up pieces of US real estate managers this year. It is equally hard to ignore the potential ramifications of these deals.

In recent weeks, PERE has reported on Hong Kong-based alternative investment manager CITIC Capital acquiring a 48 percent interest in San Francisco-based Stockbridge Capital Group and Japanese real estate company NTT Urban Development purchasing a 15 percent stake in Morristown, New Jersey-based Normandy Realty Partners.

They follow two cross-border corporate deals reported this year that are in the process of completing: Japanese telecommunications and internet corporation SoftBank Group’s purchase of New York-based Fortress Investment Group for $3.3 billion; and Japanese conglomerate Mitsui’s buy of a 20 percent stake in Los Angeles’s CIM Group.

While these transactions vary in circumstances, they have common themes, particularly in terms of motives for the American side. In the case of CIM and Normandy, both have said their affiliation with a Japanese corporation is expected to help them raise capital from Japanese institutional investors. Indeed, both Mitsui and NTTUD intend to endorse, or have endorsed, the real estate funds of their respective new partners, which should attract more investors to those vehicles.

As for the Asian buyers, the benefits of a cross-border corporate transaction go beyond just the ability to deploy capital into US real estate in a bid to improve the yield profile, diversification and stability of their asset bases, and to eschew the considerably more crowded space for asset-level deals. An entity-level investment can also be a valuable learning opportunity, as it offers an inside look at how a US real estate investment manager operates.

At the same time, cross-border corporate transactions can also bring challenges. For example, many Asian investors investing in the US real estate market focus on buying core assets, but, looking at the transactions discussed here, that is not necessarily the expertise of the firms whose equity has changed hands. In fact, all the managers that have sold stakes in recent months are best known for investing in value-added or opportunistic strategies. One would assume that the parties would have discussed any divergence in strategic preference at the outset.

Another question that inevitably occurs when a new investor enters the picture is that of cultural change. The extent of this will depend on factors such as the size of the ownership interest, the amount of control resulting from that interest and generally how hands-on or hands-off the incoming stakeholder is. Even relatively small differences in vision, values and policies can result in material changes to how a firm functions – an experience that can easily become frustrating to the people working in it.

Indeed, some firms that have experienced strategy and culture shifts following partial sales have lost not only key investment professionals, but investors as well – the latter sometimes because of the former. Such shifts were understood to be factors behind the departures of four senior executives from TA Realty in mid-2015 after The Rockefeller Group acquired a majority stake in the Boston-based real estate fund manager the previous year.

Staff turnover in turn was also cited by the Massachusetts Pension Reserves Investment Management Board as a reason for terminating its $1.1 billion core real estate mandate in August 2015, according to the pension plan’s board meeting materials at the time.

Of course, not every firm that sells a sizeable interest in itself will suffer such fallouts. Some managers have thrived and reinvented themselves after a stake sale, with the capital infusion and other support from the new partner being put to good use. Pre-IPO Blackstone inviting Chinese state fund CIC into its capital years ago is one example springing to mind. So is AEW Capital Management, which with the backing of stakeholder Natixis Global Asset Management, has continued to see substantial growth in its assets under management and client base in recent years.

What is certain, however, is that no firm can rely on staying wholly the same after a partial sale. For better or for worse, once the deal is done, it is unlikely to be business as usual.