A commonly asked question about a private real estate manager is if the firm has a fund in market. In the case of GreenOak Real Estate, however, the question is not if, but how many.
Over the past year, the New York-based private equity real estate firm closed on a trio of large funds: the $1.55 billion GreenOak US Fund III in May; the €656 million GreenOak Europe Fund II in April; and its first European real estate debt fund, the €600 million GreenOak Europe Secured Lending Fund I, in December.
The fundraises helped GreenOak break into the top 10 of the world’s largest private equity real estate firms this year. With a total of $7 billion in equity raised over the past five years, the firm placed ninth in the 2018 PERE 50 ranking, even more notable given it was founded only eight years ago. Indeed, GreenOak is only one of four firms on the overall list less than a decade old.
The manager is now understood to be bringing a new crop of offerings to market. Most notable among these is the launch of its core-plus strategy, marked by both the formation of a yet-to-be-named new US fund, which will target lower-risk property investments in the four US cities of Boston, New York, Los Angeles and San Francisco, as well as a European logistics-focused vehicle.
Also understood to be launching by 2019 are the firm’s third funds in its European and Asian equity strategies, as well as a trio of Europe-focused debt products, including Europe Secured Lending Fund II; UK Secured Lending Fund III; and a new tactical junior debt fund, European Tactical Debt Fund I.
GreenOak declined to comment on any of the funds. However, founding partner John Carrafiell explained the firm’s product mix as largely investor-driven.
“We could have taken an approach to raise a global fund, and therefore it would have been one fundraise,” he says. “We knew it was going to be harder to do that from a regional perspective, but it has been worth it since I think that’s part of how we’ve been able to grow, by having some of those investors who were US investors join us in Europe, or who were Asian investors who joined us in Europe or the US. Having investors across more than one fund has been a hallmark of our success.”
Of course, GreenOak would not be able to raise capital without strong performance: as of March 31, the firm’s two fully realized funds, Japan Fund I and US Fund I, were generating net internal rates of return of 33 percent and 32 percent, and net multiples of 1.6x and 1.7x, respectively, according to an April investor document seen by PERE.
But while GreenOak sits in an enviable position today, success was far from certain when the firm was established in the summer of 2010. Kalsi and Carrafiell, along with fellow founding partner Fred Schmidt, all had recently left Morgan Stanley Real Estate Investing, which, at the time, was facing a $5.4 billion loss with its $8 billion Morgan Stanley Real Estate Fund VI. Meanwhile, the bank also was rocked by a scandal involving the alleged misuse of assets by a real estate employee in China, in violation of the US Foreign Corrupt Practices Act. The case led to the resignation of Kalsi, then the firm’s global head of real estate, in early 2009, although he was later absolved of any wrongdoing.
‘Looking inward’
At the same time, the global real estate industry was still recovering from the shock and loss of the financial crisis – not an opportune time to be raising capital, particularly for a startup firm. “2010, 2011 were really hard fundraising environments and a lot of investors had issues with their own investment portfolios, whether with their legacy existing managers or their direct holdings,” Kalsi says. “A lot of people spent a lot of time inward looking at that time period.”
One such investor was Allstate Investments, the investment management arm of the Northbrook, Illinois-based insurer. Edgar Alvarado, who was then Allstate’s head of real estate equity, recounts having breakfast with Kalsi before the latter started GreenOak and being asked if Allstate would be an early investor in the firm. Alvarado told him he could not.
“We were in the midst of working on our own issues with the fund portfolio, and we were starting to move away from funds,” Alvarado explains. “And Sonny’s firm was a start-up, and institutions are very, very conservative, particularly coming to first-time funds.” Alvarado was later able to commit capital to GreenOak through an emerging manager program that he helped to establish at Allstate in 2013. Tellingly, he has continued to support GreenOak despite having retired from Allstate in 2016. Through his family office, he has chosen the firm as one of just four real estate managers to which to commit capital.
Alvarado finds it “inspiring” that GreenOak’s founders not only emerged from a negative situation, but arguably have become more successful on their own than if they had remained at their previous employer: “Sometimes the worst of times presents you with the best of opportunities.”
For Kalsi, a major factor in getting investor support for GreenOak was being honest about their prior mistakes. “I think we, like a lot of people, got caught up in the last cycle,” he says. “In terms of modest leverage, less risky asset classes, not taking on more development risk than we can really handle, those were the hallmarks of our prior business for the first 15 years we were there, and then as the market in 2005 to 2007 got more competitive, it got much harder for us to stick to that. When we deviated from that and simultaneously were hit by the financial crisis, we paid a pretty big price.
“I’m not sure how an investor could have given anyone a new dollar to invest in 2010 and beyond if that person didn’t own up to what the issues had been in the prior cycle, because I don’t know how they would get comfortable that they wouldn’t make the same mistakes again.”
“There’s still a list in my mind of people we used to work with in the past that we hope to work with in the future”
Sonny Kalsi
Still, Kalsi acknowledges that GreenOak may never be able to regain some of the investor relationships the team had forged while at MSREI. “Clearly, there are investors we used to manage money for in the past that I’m not sure we’ll ever get to manage money for again. There are others we partnered with in the past, we don’t manage money for now, but we might. We have a dialogue with them or have a relationship. And clearly, there’s groups like General Motors and New York Common who were really supportive of us right off the bat.”
All the difference in the world
“There’s no question that a lot of investors pushed back given the magnitude of losses at MSREI,” says David Hodes, managing partner at New York-based real estate placement and advisory firm Hodes Weill & Associates and a former colleague of Kalsi’s and Carrafiell’s at Morgan Stanley, commenting on GreenOak’s early days. “But more importantly, a couple of prior investors did support them. That was critical. It made all the difference in the world.”
For the GM pension plans, the decision to back GreenOak was a straightforward one, according to one former real estate investment officer. GM already knew the GreenOak team well, since it had been a longtime investor with MSREI, dating back to the firm’s first fund.
For GM, it was important to put the prior performance of the MSREF funds into the proper context – including the implications for the success of the GreenOak team. “It’s fair to say that no real estate investment platform was immune from the effects of the GFC,” the investment officer says. “Morgan Stanley took its share of losses, but so did many others.”
In fact, “it’s probably better to invest with a group that has gone through a challenging period like that with a sober ‘lessons learned’ mindset, in that they tend to be that much more cautious and disciplined after that kind of experience,” the officer adds. Notably, GM also continued to invest in MSREI’s subsequent funds.
Meanwhile, the challenging real estate environment was a reason to invest rather than not invest. “While continuing to invest is probably the hardest thing to do when you’re taking big hits in returns, it’s also the smartest thing you can do,” the officer says. After all, GM first invested with MSREI in the early 1990s – which also followed a significant dislocation in the real estate capital markets – and the fund’s returns “went off the charts,” the person notes.
Similarly, the New York State Common Retirement Fund also capitalized on market dislocation to make new investments post-GFC. “You want to invest when everyone is sitting on their hands. When capital is dear, that is when your capital is most valued and will do the best,” says Marjorie Tsang, formerly the head of real estate and interim chief investment officer at the pension plan.
Tsang added that NY Common profited from being a first mover in real estate in the past – for example, the pension plan was one of the first to develop the joint venture investment model, beginning in 1995, and has been “a huge beneficiary” with that strategy. Similarly, investing in emerging managers is another way for the pension plan to gain the first mover advantage. “You want to get in early with promising talent,” she says.
But as is customary with the due diligence process of many US pension plans, GreenOak had to jump through many hoops to secure its first commitment from NY Common in 2012. At the time, NY Common was interested specifically in GreenOak’s Japan fund, given its desire to diversify its real estate portfolio geographically.
Tsang already knew the GreenOak team during their days at Morgan Stanley, whose real estate funds NY Common had previously backed. But “you want to be objective and you need to look critically,” she says. “The investment history at MSREF had been weak after the GFC. In that regard, there was an emotional tension and a little bit of a blame game going on, not just at Morgan Stanley, but everywhere.”
To evaluate GreenOak, the pension fund enlisted the help of Franklin Templeton, which manages one of the pension plan’s real estate emerging manager programs. Franklin Templeton’s Asia team took the lead both in vetting GreenOak executives individually and the overall team’s previous track record. The interviews – which involved speaking with each person alone in a room for hours – gave Franklin Templeton the comfort to recommend a $25 million commitment through the emerging manager program.
But the commitment also had to pass muster with the overall real estate team, then-chief investment officer Raudline Etienne, who “grilled” Kalsi during her review process, the real estate advisory committee and finally, the New York State Comptroller, Tsang recalls. NY Common has now committed more than $300 million to GreenOak across multiple funds.
Further underscoring the importance of the initial backing by GM and NY Common was the fact US Fund I and Japan Fund I both missed their targets, having each raised $265 million against a $300 million equity goal.
Additional investor support has come over time, Kalsi says, noting that with the firm’s most recent funds, limited partners included brand new investors as well as legacy MSREI investors that were investing for the first time with GreenOak. “There’s still a list in my mind of people we used to work with in the past that we hope to work with in the future,” he says.
Today, more than 50 percent of GreenOak’s investors had invested with the team prior to the firm’s formation, according to Carrafiell.
Getting it right
How Kalsi and Carrafiell have chosen to run GreenOak has been directly informed by past mistakes.
“We knew there wouldn’t be a third chance,” says Carrafiell. “This is our second chance, if you will, to get this right.”
“We knew there wouldn’t be a third chance. This is our second chance, if you will, to get this right”
John Carrafiell
Getting it right has meant keeping a tight investment focus, in terms of geographic markets and property types, as well on as the amount of risk and leverage the firm will take on. It also has meant staying disciplined: when GreenOak deemed the US market to have become very expensive by the fall of 2015, the firm opted to not make new investments and remain patient.
“I’m not sure the 30-year-old Sonny would have made that call, but with the 50-year-old Sonny, that’s it,” says Kalsi. “I’m not going through again what I went through personally before.”
GreenOak was a net seller in the US for the next 24 months and did not begin investing again until the fourth quarter of 2017. Similarly, the firm has remained on the sidelines in London, where it sold off most of its assets by the summer of 2015 as that market also became very pricey.
But what is critical during times of low deployment activity is to keep investors informed. “When we have these relatively quiet periods, we’re talking to them,” says Kalsi. “We tell them about what we’re seeing, what we’re not seeing, why we’re not doing investments.”
The ex-GM investment professional believes this straightforward communication approach has been one of the keys to GreenOak’s success: “They tend not to sugarcoat things in terms of specific investments that they’ve undertaken, and they tend not to sugarcoat market conditions, either.”
GreenOak also has made a concerted effort to keep its organization lean. “They’ve organized themselves differently than in Morgan Stanley,” observes Hodes. “They wanted to keep the organization tight and focused; they really wanted to make sure senior management has their eyes on everything, just to make sure that no investments are moved along that aren’t really right for them.”
At its peak, Morgan Stanley’s real estate investment business had over 1,000 people, says Hodes. “Even a strong manager is challenged to control such a large platform,” he notes.
By contrast, GreenOak has more than 100 employees globally, including 15 partners. Close to 50 percent of the GreenOak team remains former colleagues from Morgan Stanley. Last year, Schmidt decided to sell his approximately 25 percent stake in the firm for personal financial reasons and gave up his global management responsibilities. However, he continues to lead investments and strategy for the firm’s Asian business.
Carrafiell says the firm takes a very hands-on approach in evaluating and reviewing investments, having now acquired more than 200 buildings: “We have a commitment that we’ve kept to, where one of us, or our partners, walk every single building we buy – and usually it’s several of our partners and usually it’s more than once. It’s hard to do that when you’re 10 times our size.”
Managing strategy creep
But as GreenOak has grown its funds platform, some industry observers question whether that expansion may be a form of strategy creep. “There’s only so many times you can ask investors for commitments,” says one competitor, who says having too many products hurt fundraising efforts for a previous employer.
Tsang, however, sees the expansion of GreenOak’s funds platform as part of a natural evolution of a firm: “It is inevitable to have multiple strategies. When you look at some of the most successful global firms that made it through the GFC, they moved their strategies as opportunities moved around the world. Being static is not necessarily a sign of stability. Having that discipline and not stretching themselves too thin is one of the many lessons GreenOak learned.”
Although GreenOak has increased its offerings, typically with products that are complementary with existing funds, the firm will not pursue a strategy where it does not have a competitive advantage, Kalsi says. For example, it has taken a cautious approach to date in US credit, despite having built up a European debt business, which now accounts for 20 percent of the firm’s assets under management.
“We’ve got to feel like it’s a really interesting opportunity, we have some differentiated approach to it, or there’s an existing team,” says Kalsi. “We’re not trying to fill in the boxes on a piece of paper.” As a testament to this attitude, GreenOak is only raising one fund in Asia and currently does not see the market opportunity to raise additional products in the region.
Running their own firm has allowed Kalsi and Carrafiell a degree of selectivity they did not have in the past. This time around, Kalsi says: “We don’t have to be anywhere. That’s the most powerful thing for us.”
GreenOak Real Estate
Headquarters: New York
Total AUM: $9.4bn
Top executives: Founding partners John Carrafiell, Sonny Kalsi and Fred Schmidt
Employees: 103
Investors include: General Motors, New York State Common Retirement Fund, Allstate Investments
GreenOak’s global expansion
The firm has launched funds seven out of eight years, and is understood to have two new and five follow-on offerings in the pipeline
2010
GreenOak established with offices in New York, London and Tokyo
2011
Opens Los Angeles office; launches US Fund I
2012
Launches Japan Fund I and UK/London office program
2013
Launches UK Secured Debt Fund I, US development platform and Spanish tactical program
2014
Opens Madrid and Seoul offices; launches US Fund II and Europe Fund I
2015
Opens Luxembourg office; launches Asia Fund II
2016
Opens Milan office; Europe Fund II, UK Secured Debt Fund II, European Secured Debt Fund I
2017
Opens Mumbai office, launches US Fund III
2018
Launches US and Europe core-plus funds, Europe Secured Lending Fund II and European Tactical Debt Fund I
2019
Expected to launch UK Secured Lending Fund III, Europe Fund III and Asia Fund III
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