For more than 30 years, Sam Zell has cast a long shadow on the United States real estate market. As founder and chairman of four publicly traded real estate investment trusts, including Equity Office Properties Trust and Equity Residential, the country's largest publicly traded owners of office buildings and multi-family apartments, respectively, Zell oversees a collection of companies with a combined market capitalization in excess of $25 billion (€20 billion). Equally impressive, he's also recognized as one of the fathers of the modern private equity real estate industry, having created one of the first opportunity funds with Merrill Lynch in 1988.
Seventeen years later, the Chicago real estate entrepreneur is now setting his sights on the worldwide property markets via Equity International, the global opportunity fund he founded in 1999. Led by chief executive officer Gary Garrabrant, Equity International is currently in the market with its second investment vehicle, EIP Fund II, targeted at $400 million.
Although Equity International is, in many ways, much smaller than some of the other companies in the Zell universe, that doesn't diminish the scope of its strategy – the firm has invested in Mexico, Venezuela and Brazil and is currently assessing opportunities in China and India – or the size of its ambitions. “Think of us as the little speedboat in the harbor surrounded by all these mega ships,” Garrabrant says. “But at one time, all of those started as speedboats too.”
In fact, in an effort to replicate the success of those mega-yachts – particularly Equity Office Properties, which began life as the Zell-Merrill opportunity funds – Equity International was originally intended to become a publicly traded vehicle. It didn't take long for Garrabrant and Zell to recognize, however, that a different strategy was required.
“Honestly, the initial vision was to form an international REIT,” Garrabrant says. “But we learned in six months that it was a dumb idea – we couldn't get paid for the risk. We needed to raise the bar and we did so by taking strong positions in operating companies.”
The firm focused most of its first fund, which raised $370 million, pursuing that strategy in Mexico, where it acquired interests in five operating companies, including a hotel company, a specialty finance provider and an industrial property business. According to Garrabrant, the most prominent investment was in Homex, Mexico's third largest homebuilder, which went public in 2004, two years after Equity International first acquired its initial stake in the business.
“We like Mexico and we were in there early,” Garrabrant says. “Now it's de rigueur. Seven years ago, it wasn't. People thought we were crazy.”
Hoping to replicate its success in Mexico, Equity International has recently invested in Brazil, another market that most private equity and real estate investors avoid. This past summer, Equity International acquired a minority stake in Gafisa SA, a residential developer based in Sao Paolo, for $50 million. In addition to a burgeoning middle class – one of the reasons Equity International was so keen on Mexico – Brazil also provides something that many other countries cannot: size.
“People are very glib when they throw out areas of the world,” Garrabrant says. “The international realm is challenging and in most cases it's not scalable. I don't want to go anywhere and just do one thing – I like to have multiple operating platforms.”
Perhaps unsurprisingly, that focus on scalability has led the firm out of Latin America and into China and India. Although Equity International has yet to make an investment in either country, it is actively on the ground looking for partners and opportunities, most likely the for-sale housing market in secondary cities in China. Garrabrant notes, however, that it takes a long time to get comfortable in a foreign country – the firm was looking at Brazil for six or seven years – and only recently has their opinion of China turned positive.
“China has been near the top of our list when it comes to cynicism,” notes Garrabrant. “But over the past year, our view has changed – were sensing that it's real. The overbuilding is not as severe as people advertise.”
As the firm closes in on its fundraising goal, Garrabrant and his team will no doubt continue to look for those “real” opportunities around the globe. And while Garrabrant notes that his main focus is on finding, acquiring and managing a strong basket of real estate operating companies, he doesn't rule out the possibility that, one day, Equity International may fulfill its initial vision and follow in the footsteps of its older, larger – and publicly traded – sister companies.