SPECIAL REPORT: Thrivers and survivors

These 15 firms have the skills and strategies to dominate the real estate wasteland, say market insiders. PERE Magazine September 2009.


Mad Max: post-apocalypse
thriver, just like the 15 firms named below.

The ongoing market disaster has given rise to many real estate fund managers who claim that now is the best opportunity they’ve ever seen to buy property assets.

But saying you want to buy amid distress is one thing; actually having the infrastructure, staff, judgement and capital to do so is something else entirely. PERE spoke with investors and other market participants around the world to hear views on which general partners can say with greatest confidence that this is their kind of market.

Our resulting, subjective list of 15 is a diverse group. Some are new platforms with innovative strategies, some are established groups with troubled legacy portfolios, who nevertheless are among the few investors to have already navigated and profited from the kind of mess we find ourselves in today.

We’re certain our readers will disagree with some of our inclusions and exclusions, but the editors of PERE are confident you’ll agree that this is a group of GPs, profiled here in no particular order, that will be closely watched over the coming years.

PERE's list of 15 (in alphabetical order): • Angelo, Gordon & Co. (New York) • Apollo Global Real Estate (New York) • Arch Bay Capital (Irvine, California) • The Blackstone Group (New York) •Brookfield Asset Management (Toronto) • Colony Capital (Los Angeles) • Goldman Sachs Global Special Situations Group (New York) • ING Real Estate Investment Management Asia (Hong Kong) • Lone Star Funds (Dallas) • Mesa West Capital (Los Angeles) • Northwood Investors (New York) • Oaktree Capital (Los Angeles) • Orion Capital Managers (London) • Secured Capital Japan (Tokyo) • Westbrook Partners (New York)


Angelo, Gordon & Co

PPIP players

“Conservatively aggressive” is not a phrase you’d immediately associate with most private equity real estate firms, however that’s how PERE will categorise Angelo, Gordon & Co for the purposes of this feature. Starting with “conservative”, the New York-based investment firm has spent much of the past two years raising its largest funds to date, the $1.26 billion AG Realty Fund VII and the $794 million AG Core- Plus Realty Fund III.

The vehicles were closed in 2007 and 2008 and to date still have roughly two-thirds uninvested capital. Watching the global real estate sicken from a diet of cheap debt, Angelo, Gordon – founded by John Angelo and Michael Gordon in 1988 – was instead an active seller of US properties in 2007 and early 208. That has stood them in good stead giving the real estate team, led by senior managing director Keith Barket, the firepower with which to now be aggressive.

Between late 2008 and spring this year, that strategy focused primarily on the acquisition of real estate investment trust bonds as a means of targeting the underlying assets, as the REIT bond sector suffered one of its worst years on record. A rally of high-grade REIT bond prices has prompted Angelo, Gordon to sell half of its positions, industry sources say, but not before making a healthy return.

Today the firm is concentrating on distressed  situations in the US and Asia – where it is currently raising its second Asia fund, AG Asia Realty Fund II, reportedly targeting$1 billion. Where Angelo, Gordon is most visible today though is in its participation of the US government bailout programme, the Public-Private Investment Program (PPIP), after it was selected with GE Real Estate as one of nine fund managers to take part in the initial round. The two firms have until the start of October to raise at least $500 million. Now that’s conservative aggression.

Apollo Global Real Estate

Leon Black’s firm has launched a new platform at just the right time

Leon Black is back in the shape of Apollo Global Real Estate.

The man who co-founded Apollo Real Estate Advisors in 1993 to feast on the RTC carcasses has recently set up a new real estate platform under the same roof as his private equity group to feed on current financial calamities.

The beauty of this, of course, is that Apollo’s new real estate firm has no digestion issues to deal with. Instead, it has been able to concentrate on assembling a talented team to profit from this cycle’s opportunities.

Leon Black

Black hired Joe Azrack, former head of Citi Property Investors and the “grandfather” of property fund management, in 2008 to organise the reborn Apollo real estate business. Azrack in turn has busily hired guns in equity and debt investment and has been building an appropriate model. In July the firm filed to float a $600 million REIT, Apollo Commercial Real Estate Finance, which will originate and swallow up whole loans, CMBS, and other real estate debt instruments. At the same time, it has been readying its first distressed property fund.


Sources say AAA, the listed  investment firm Apollo established on the Euronext in 2006, has committed capital and several other LPs want to commit. At the moment, Apollo is building up considerable experience buying real estate debt at deep discounts. In Europe, it has been active in buying  up residential loans particularly in Germany on behalf of Apollo European Principal Finance Fund.

What is its edge? Apollo uses its UK estate agency Countrywide as a platform to manage and work through the loans. It acquired UK-based Countrywide for around £1 billion in 2007. One word of caution: the private equity side of Apollo has its share of struggles, but Black is a maestro of capital market complexity.

Arch Bay Capital

Arch Bay brings analysis and technology to mortgage workouts

Just as some funds of hedge funds maintain direct control of their externally managed accounts, Arch Bay Capital maintains real-time data monitoring inside the many mortgage servicing companies it hires to work out the subprime loans it owns.
In a troubled world where delays can often mean losing the engagement of the borrower, Irvine, California-based Arch Bay has the systems and people in place to rapidly respond to new opportunities to recover value.

The firm is backed by New York-based York Capital Management, which has some $9 billion under management. It is led by Shawn Miller and Steven Davis, who previously ran servicer 3 Arch.

Among 3 Arch’s clients was Countrywide. The former service provider has now become a principal investor. Arch Bay earlier this year reportedly purchased $600 million worth of non-performing loans from Wells Fargo. (Executives from Arch Bay declined to comment for this article). One suspects that more such transactions are on the way.

Arch Bay, with the money, people and infrastructure to extract value out of thousands upon thousands of problem loans, gives further definition to an emerging asset class.

The Blackstone Group

The Blackstone real estate team is educating investors whilesitting on a mountain of money

Chad Pike

The Blackstone Group’s real estate business has made no secret of the fact that is has $12.4 billion in dry powder across its strategies, including €3.1 billion for its latest European effort.Nor has it resisted telling all and sundry that it is patiently waiting on the sidelines to deploy the bulk of said equity, but probably not until the end of 2010.

What the firm has been less vocal about is what it has been doing in the meantime. As you’ll read in the September issue of PERE, Blackstone’s investment squad has been morphing itself into a team of macro-economists in order educate themselves and investors about the true state of the market.

 The firm has some legacy issues (Hilton Hotels for one) but expect Chad Pike and Jonathan Gray’s co-led team to have done their homework by the time the dry powder begins to fire off.

Brookfield Asset Management

Seasoned Canadian investment house has amassed $4 billion in firepower.

Watch this Canadian firm go.

Toronto-based Brookfield Asset Management, with $35 billion of property under management, has experience of buying I the 1990s distressed real estate in the US, and has proved over the years it I not afraid of big complex take-privates.

Earlier this year, the firm, led by chief executive officer Bruce Flatt, appointed former Bear Stearns global equity raiser Leo Van den Thillart to plug into the global capital sources, and last month revealed it was ready for the mammoth buying cycle with $4 billion of commitments to its Real Estate Turnaround Consortium, which will enter intoclub deals around the world.

Colony capital

Despite its problems, Colony has the right experience for today’s market

How do you differentiate between those firms that will thrive in the current downturn, and those that will merely survive?

It was a question that dominated discussions among PERE editors in preparation for this article. Part of Colony Capital’s portfolio is in survivor mode.

The Los Angeles-based firm has more than a few troublesome legacy assets, not least Station Casinos, which last month filed for Chapter 11 bankruptcy protection.

Over the past year, Colony’s $4 billion Fund VIII returned investors negative 85 percent and negative 72.9 percent since inception, according to Los Angeles City Employees' Retirement System fund performance documents obtained by PERE under the state open records law.

Yet despite that, Colony has among the longest track records as a distressed player that we believe will carry it through, and help it thrive going forward. The firm has already floated a debt REIT seeking to raise $500 million from the public markets, and recently hired Brent Elkins from Morgan Stanley Real Estate's placement business to develop and raise new funds.
Given the performance of Fund VIII alone, it takes guts to ask investors for more money, but Colony Capital and founder Tom Barrack refuse to be distracted by legacy issues when new opportunities face them. It is such tenacity that will help this firm thrive.

Goldman Sachs

Goldman’s best real estate investing may come from a group other than REPIA.

Even setting aside the conspiracy theories, you’ll never find a PERE staffer betting against Goldman Sachs.

That said, Goldman’s Real Estate Principal Investment Area (REPIA) has for years been synonymous with the Whitehall family of funds, and although Goldman says Whitehall is business as usual, people close to the firm say the future of that particular brand is in question owing to unsatisfactory performance.

So is Goldman going to sit on the sidelines during the greatest real estate market dislocation in a century? Fat chance. But the team to watch is inside Goldman’s Global Special Situations Group, which according to sources is actively mopping up property-related debt.

One friend of the firm even predicted they would “be another Lone Star”. For Team Goldman, that would no doubt be on the modest end of their ambition.


ING REIM rises in the East

ING Real Estate Investment Management (ING REIM) shelved its global opportunity platform in March, but the firm is intent on increasing its exposure in Asia.

Led by regional chief executive officer Richard Price from Hong Kong, the firm has vehicles for both Pan-Asian and Chinese investment programmes as it seeks to expand the approximately $5 billion of real estate assets it currently manages across the continent.

In Japan, ING REIM has assumed the role of white knight for the 27 LPs in the $772 million New City Asia Opportunity Fund, after winning a beauty parade of GPs to take on the management of the fund from previous incumbent New City Asia Fund Management.

Price told PERE that the firm could use the platform, rebranded Phoenix Real Estate Fund, to invest fresh ING equity. The awarding of the mandate to ING REIM also proved an endorsement of ING REIM’s asset management credibility. Japan country manager Hidetoshi Ono said the firm’s first instruction was to preserve the value of the fund’s  assets in Japan, China and South Korea.

Just one month earlier, news broke that ING REIM would follow up its 2006 $500 million opportunity fund debut in China with a second vehicle targeting $750 million. ING REIM plans to use the vehicle to invest in residential assets, and expects to hold a first closing before the end of the year.

With little in the way of legacy issues on the continent, the real estate investment division of the Dutch bank is allowing its Asian arm to assume the growth mantle. With displays of investor support as demonstrated with the New City fund, expect it to continue along the same path in the immediate future.

Lone Star Funds

The stars align for Lone Star

John Grayken

Lone Star has been described by competitors as “a real estate monster” poised to become “the biggest name in private equity real estate over the next three years.” The reason? Lone Star, founded by Bostonian John Grayken, has grown into a platform able to raise $24 billion in equity since its inception in 1995, principally because it has thrived from others’ distress.

Examples of this include a four year stint in Germany where the firm bought approximately two-thirds of all the bad loans in the country during  the early naughties and more recently, the massive $30.6 billion capture of collateralised debt obligations from Merrill Lynch for $6.7 billion.


The firm is fixed on repeating these endeavours in Asia too, particularly in Japan, and if its past success is a barometer for the future, then Lone Star’s monster will clean up. support as demonstrated with the New City fund, expect it to continue along the same  path in the immediate future.

Mesa West Capital

LPs respond robustly to an offering from Mesa West

Trying to get commitments out of LPs today is like trying to draw blood from a stone.

For debt shop Mesa West Capital though, the stones are bleeding profusely. The Los Angeles-based firm, founded in 2004 by Jeff Friedman and Mark Zytko, has just exceeded its fundraising target for its second vehicle Mesa West Real Estate Income Fund II.

The firm has secured $420 million in commitments against an original target of between $300 million and $400 million. LPs have encouraged the company to carry on fundraising, with expectations it could garner between $500 million and $600 million.

Sources say the firm has a potential $1.5 billion of capital to deploy, once commitments, leverage and securitisations are taken into account.

Mesa West is believed to be one of no more than a handful of US funds to have topped its target, and the only debt fund to do so. The reason is the firm’s focus on the “value-added” space of debt origination, particularly first mortgages. This focus on the lower-risk debt spectrum is especially appealing to LPs who understand that debt is the new equity.

Northwood Investors

Ten years is a short hold for upstart Northwood

Already listed in PERE’s emerging-managers-to-watch feature, there are many reasons why John Kukral’s Northwood can be considered a thriver.

One of those is timing. Kukral closed his debut fund Northwood Real Estate Partners I (NREP I) last July with $1.25 billion of commitments, and – although some would argue timing is just a matter of luck – the New York-based firm is believed to have kept much of its powder dry.

However, the way Kukral has structured the fund will also help Northwood thrive in the current environment, and in future years. Unlike like typical private equity vehicles that invest and exit  within five or seven years, NREP I focuses on longer-term assets, with a holding period of up to  a maximum of 15 years.

This “evergreen” strategy is particularly appealing to LPs in search of managers more aligned to their longer-term view of the real estate business. And, of course, we can’t forget Kukral’s track record. As former president of Blackstone Real Estate Advisors from 2002 until his  departure in 2005, Kukral is widely known as a “smart and very well grounded real estate guy”.

With LPs  evaluating all their fund manager relationship, such a reputation can only help Kukral go from strength to strength.

Oaktree Capital Management

No global firm is better positioned than Oaktree Capital

This is prime time for Howard Marks, who leads Los Angeles-based Oaktree Capital Management.

The veteran firm was named among five to participate in the US government’s Public-Private Partnership Investment Program. And no wonder – the firm already has some $14 billion under management targeting “stressed” debt, and about $1 billion targeting specifically real estate assets.

Few firms have the scale and history of Oaktree when it comes to working out troubled assets, and so it’s safe to predict that many more troubled assets will be coming their way.

Judging by his hugely well written investor memos, the father of distressed investing is clearly energised by his dance with the Mother of All Recessions.

Orion Capital Management

In the European market, Orion has a fat wallet and room in the cart.

Whether by luck, design, or a mixture of the two, Orion Capital Managers exited most of its portfolio by the onset of the credit crunch in August 2007. Then the firm managed to raise the lion’s share of €1 billion before the curtain came down on LP commitments, post-credit  crunch.

Having got its market timing right, Orion has the track record to now search for value. Founded in 1999 by Van Stults, Aref Lahhan and Bruce Bossom, the firm currently manages three opportunistic vehicles as well as a core income product from offices in London, Paris, Madrid and Milan.

The firm  is a little publicity shy, but sources make clear that it is actively investing. The first investment for Orion European Real Estate Fund III, which has not yet closed, came in February this year when it acquired a 7.25 percent stake in French property company, Societe Fonciere Lyonnaise (SFL) from Goldman Sachs.

At the time, SFL managing director Nicolas Reynaud told PERE it marked one of the few transactions of 2009. It then followed up in May by acquiring one of Spain’s largest malls, Plenilunio shopping centre in Madrid, for a reported €235 million from the troubled Banco Santander’s Banif Immobiliaro open-ended vehicle.

To help them liaise with investors, Orion hired a former Lehman Brothers professional in May. New recruit, Lisa Feifer, is surely hoping she will have nothing but good news to impart to LPs in the coming years.

Secured Capital Japan

Secured Capital Japan is in a league of its own

Katsuya Takanashi

Secured Capital Japan (SCJ) was one of very few firms to avoid purchasing property on its balance sheet before flipping them into externally-managed vehicles, a method widely adopted by rival Japanese firms, particularly during the run up to the credit crunch. As a result, many argue SCJ is well placed to take advantage of the current market malaise as its closest competitors lick their wounds.

The Tokyo-based firm, led by president and chief executive Katsuya Takanashi, could have found itself distracted by an ailing share price but, in March, Hong Kong-based investment manager Pacific Alliance Group (PAG) purchased convertible bonds issued by SCJ which represented an approximately 40 percent stake in the firm.

Chris Gradel, co-founder of PAG, said at the time the $46 million investment would create “one of the few remaining well capitalised real estate fund management firms in Japan”.


The firm, which was formed in 1997 by the principals of Los Angeles based Secured Capital Inc, has been successful in raising $535 million for its fourth real estate fund, which closed last month. The vehicle has allotted up to 25 percent for non-performing loans, an area in which Takanashi has experience.

With few local competitors, SCJ would be a solid bet for success in the immediate future.

Westbrook Partners

Boosting headcount

It’s not all about dry powder, but it does help.

As private equity real estate firms eye the opportunities, there is one factor that all players agree on: cash is king. And New Yorkbased Westbrook Partners has $3 billion of it, putting it in prime position to capitalize on the opportunities at hand.

Even after offering all investors in its latest fund, the $2.5 billion Westbrook Real Estate Fund 8, the chance to reduce their commitments by up to 40 percent, only a few LPs jumped at the chance. Indeed, it is believed the vehicle reduced by just $200 million, against a potential $1 billion.

Part of the reason is founder Paul Kazilionis. As one LP says: “He is a very, very astute investor.” Former president of the GP of the first Morgan Stanley Real Estate Fund, Kazilionis has been a part of the real estate opportunity funds business since its early days. He formed Westbrook in 1994, and has since returned a projected 2.1x multiple and gross IRRs of 24.7 percent over Funds 1 to 6, according to US public pension, the New Jersey Division of Investment.

Of course, like all firms, Westbrook has some legacy issues; however it’s a platform that (unlike many) is actually growing. Since the start of the year, Westbrook has hired 10 people as it looks to target opportunities in the US, UK, France and Japan, boosting the firm’s total headcount to around 100. Much of the senior team has also been with the firm for more than a decade. The LP adds: “Everyone talks about dry powder and the distressed opportunities out there, but it’s also important to have a GP that actually makes that happen.”