The good ship Park Hill

Once again, a well-known franchise in the private equity real estate industry has had a change of course thrust upon it by the elements.

Park Hill Real Estate does not live or die by Blackstone. Blackstone does not live or die by Park Hill Real Estate.

If those two statements surprise you, it is a measure of how widely misunderstood the relationship is between the two entities – Blackstone being an alternatives manager and Park Hill being a wholly owned placement agent within Blackstone's advisory business.

And if you were unsure of that, it is a pretty safe bet that the industry doesn't really get what the separation of Blackstone's advisory businesses including Park Hill means either.

In case readers are in the dark, on October 10, Blackstone announced a plan to spin off its M&A, restructuring and Park Hill businesses and combine them with Paul Taubman's PJT Partners. The entity will become an independent, publicly traded company in 2015 in which Blackstone boss Stephen Schwarzman and the other Blackstone shareholders (including real estate’s Jon Gray) will initially own 65 percent, and Taubman, his partners, and Blackstone employees of the advisory business will initially own around 35 percent.

Look upon this spinout-cum-merger as one of those common instances in the private equity real estate industry where a well-known franchise has something happen to it, rather than doing something to cause something to happen.

The root cause of the plan is to do with the valuation of Blackstone's shares and those in the boutique advisory field. Schwarzman and colleagues have already seen a chasm open up between the valuation of the alternative asset manager's shares expressed as a multiple of future earnings and the same measure at boutique advisory groups such as Evercore, Greenhill and Moelis.

Whereas Blackstone trades at 9x to 10x projected earnings, the Evercores of the world are more likely trading in the 17x to 20x range. That tells you what you need to know about investor expectations of future growth. The advisory groups are enjoying the fruits of an M&A boom, and have picked up business from larger and conflicted rivals. Blackstone itself says its investment teams or its M&A and restructuring groups have had to give up business because of conflicts. So the split is designed to create a separate entity that unlock values.

So the separation clearly makes sense. But what does it mean for Park Hill Real Estate and Blackstone Real Estate going forward?

It is a common misconception that Park Hill needs Blackstone. But actually both benefit from the other. And, crucially, this mutually beneficial relationship will likely continue.

In any given year when Blackstone is raising a fund, Park Hill will derive roughly 10 percent of its fees from its owner. And Park Hill is said to contribute roughly 10 percent to 15 percent of Blackstone's fundraise. Currently Park Hill is working for Blackstone on one raise, and will also be working on its next global real estate fund at the end of the year. There are no signs it will lose its chief client and remember Blackstone will remain a shareholder in Park Hill’s new mother ship so it will want to support its investment.

Meanwhile, Park Hill Real Estate 2.0 will be looking to grow its opportunities further. One can easily imagine new opportunities from the newly empowered real estate M&A practice when its separation from Blackstone becomes more visible. In addition to the bread and butter fundraising mandates, advising on joint venture asset deals for example or capital raising work for public property companies are also on the cards. If this change of course proves lucrative, the good ship Park Hill will continue to brave the waves of real estate for years to come.