The world according to Whitehall

Seventeen years ago, Goldman Sachs' Whitehall Street Real Estate funds began life with what at the time was an impressive amount of capital – $146 million – to acquire real estate loans from the Resolution Trust Corporation. Now, almost two decades later, Goldman Sachs and Whitehall remain top players in a market that has ballooned in size. The firm had raised more than $26 billion across various funds. It has some 130 professionals in 10 offices around the world, not to mention the full support of the awesome Goldman Sachs franchise.

There are only a handful of firms that can rival Goldman Sachs and Whitehall for its capital-raising prowess and global reach. The firm may be unmatched in its fee-collecting prowess. In an already non-transparent market it is hard to find a firm more secretive than Goldman/Whitehall. And their approach to deal-making is so controlling that some rival firms have referred to them, semi-jokingly, as “The Evil Empire,” according to a former professional at a competing firm.

In an attempt to better understand what sets Whitehall apart from the many other private equity real estate firms, PERE magazine spoke with former Whitehall employees, limited partners, advisors and rival business professionals. Gathering facts on Whitehall was a challenge, to put it mildly. Though Goldman Sachs Real Estate Principal Investment Area (REPIA), of which Whitehall is a crucial component, has raised 19 funds over the years, there is little public or private information available to shed true light on its operations. Goldman Sachs declined to comment for this article.

A closer look at Whitehall (headquartered at 85 Broad Street, above) reveals a firm that puts an impressive amount of its own money at risk, drawing heavily on partner and employee capital. It also uncovers several recurring themes, notably investors who question the recent performance of Whitehall funds as well as what many view to be the off-market fees and terms that those outside the Goldman family must bear.

Whitehall through the years

The Whitehall fundsREIPA has raised more than $26bn in 19 funds since 1991. It's largest to date was Whitehall Global 2007, which topped $4.8bn.

Key people in Goldman Sachs' Real Estate Principal Investment AreaStuart Rothenberg, global head REPIARothenberg started at Goldman Sachs as an associate investment banker in 1987. He was involved in the creation ofWhitehall Street in 1991, helping strike the first RTC deal. He became a managing director in 1996 and the chief operatingofficer in 1998. He became head of the group, taking over from Daniel Neidich, in 2003.Brahm Cramer, chief operating officer REPIAA Goldman Sachs veteran since 1990, Cramer was appointed chief operating officer in 2003. He was formerly chief financialofficer from 1999, having first joined REPIA in France in 1996.Jean de Pourtales, head of developing markets REPIAde Pourtales first transferred to REPIA in 1998, 10 years after first starting work for Goldman Sachs. He has spearheaded effortsin India and Russia over the past three years, which have led to joint ventures in both country. He become a partner in 2006.Toshinobu Kasai, managing director REPIA Japan AcquisitionsKasai set up the Japanese asset servicing platform for Goldman Sachs Realty during his time as a vice president of the bank's Asianspecial situations group. He was appointed head of REPIA in Japan in 2002 and made a partner in 2004. Prior to Goldman Sachs, Kasaiworked for Daiwa Securities.Jonathan Langer, head REPIA US acquisitionsHaving joined Goldman Sachs as an analyst in 1994, Langer was made a managing director in 2003. He became a partner in 2006.Edward Siskind, co-head REPIA EuropeLike Rothenberg, Siskind was among the founding members of REPIA, having transferred to the department in 1992. Based in London,Siskind oversees not just the Whitehall funds but the real estate advisory and lending businesses of Goldman Sachs in Europe as well.Siskind replaced former European head Richard Georgi when he left Goldman Sachs in 1999.Richard Powers, co-head REPIA EuropePowers first REPIA in 1999 as a vice president before being promoted to managing director later that year, and made partner in 2002. Heleads REPIA's European operations with Siskind. Prior to joining Goldman Sachs, Powers worked for GE Capital and New Europe.Recent performance
Whitehall has had some spectacular successes on a deal-by-deal basis. But a key concern among investors and advisors that have scrutinized the Whitehall funds, however, was that of aggregate performance. One placement agent, who said his team recently made an assessment of REPIA funds to date, said together they had averaged a gross IRR in the region of only 14 percent.

An investment officer at a major US pension said he stopped investing in the Whitehall funds because of concerns over returns, which he described as “never stellar.”

Judging the returns of the Whitehall funds is not a task made easy by Whitehall – a recent PPM does not present fund-level IRR information, unlike the vast majority of PPMs. But information from Private Equity Intelligence, or Preqin, an alternative investment data service, seems to back up the assertion that recent Whitehall funds have not outperformed. Preqin lists three Whitehall funds from vintage years 1997, 1998 and 2000 as having net IRRs of eight percent, eight percent and six percent, respectively. This puts the Whitehall funds below the benchmark performance for private equity real estate funds in those vintage years, according to Preqin.

Net returns to LPs are always dampened by carry and other fees, but in the case of Whitehall, investors complain that the fee-taking is noticeably greater. One former Whitehall LP tells PERE that REPIA was very much about “fees on fees on fees.”

One former Whitehall dealmaker said REPIA charges “substantial fees higher than anyone,” detailing fees for financing, acquisitions, associated investment banking and Archon asset management, to name but a few. According to this source, many of Whitehall's deals in fact deliver returns in the low teens to 20-percent-plus range. Net of fees, however, investors exposed to these deals usually end up with something in the eight percent to 10 percent range. “It is good for Goldman,” he comments.

“Whitehall doesn't sit that well in the portfolios of large institutional investors,” says one source, citing concerns over net returns. “The high-net-worth clients are less sensitive to the fees,” he adds.

As a former Whitehall professional points out, investors who back Whitehall funds are buying into the vaunted Goldman Sachs franchise. “Goldman Sachs is the top investment bank, able to attract the best people and the culture of the firm has always been for areas to work together to create value based on the franchise,” he says. “Whitehall has probably been as good if not better than any other private equity real estate firm in terms of creating value for investors. People want to do business with Goldman Sachs and that's the advantage of investing with the franchise.” The Goldman Sachs business model may be more expensive to run, he continues, but investors are sophisticated enough that they wouldn't invest if they didn't like the returns.

One Goldman insider argues that the fees charged by Whitehall are common in real estate and private equity. Furthermore, he says, if Whitehall were not paying fees to Archon it would be paying similar fees to external asset-management companies.

This same source also notes that Whitehall's management fees are typically 50 basis points on “gross asset cost” of the investments, which means LPs pay fees only on money that has been put to work.

Pool's gold
Incentivizing Archon is a tricky undertaking.
Like most large private equity real estate firms, Goldman/ Whitehall work with operating partners who receive incentive fees based on the profitability of the investments they work on. In Goldman's case, it is the 100 percent owner of its asset-management team, Archon.

According to a recent Whitehall PPM, incentive fees to asset managers, including Archon, are generally “aggregated based on four levels of categorization: by fund, by country, by product type and by currency. In other words, assets of a particular type (e.g. hotels) acquired by [the fund] in any particular country and denominated in the same currency will be pooled together for purposes of calculating the incentive fees…”

A fund-formation lawyer says operating partners usually demand that their incentive fee calculations not be weighed against the success of other investments in the fund in which they had no role. In other words, the manager of a hotel investment in Japan doesn't want to see his or her incentive fee go away because of a bad multi-family deal in Nevada.

The pool-by-pool incentive fee calculation for Archon stands in contrast to carried interest calculation for the GP, which is based on the performance of the fund as a whole.

The Goldman way
Yet despite the mixed Whitehall track record, REPIA is still able to attract large sums of capital. One insider revealed that the bank's private wealth management team via the special investment group, handles much of the fundraising for Whitehall. By plugging into the bank's powerful network of highnet-worth clients, REPIA has been able to regularly raise large funds. According to the source, typical REPIA fundraising usually takes only two to three months. Goldman professionals will also commit significant portions of their own capital to Whitehall funds. The 2007 PPM states that for the Whitehall Street Gloabal Real Estate 2007 fund, 41 percent of the capital raised ($1.99 billion of the $4.815 billion) was from the bank and employee funds. Since 1991, the size of Goldman Sachs contribution to REPIA funds has been an average of 27 percent.

On the deal front, Goldman has an aggressive, self-assured style of investing. “Whitehall has a reputation of getting it done, they have deep pockets and when they want to do something, they do it,” says one placement agent. Indeed, REPIA's PPM spells out how its global reach and investment banking relationships have worked for Whitehall in the past. These relationships have proved particularly valuable to the Whitehall funds in corporate divestitures and in transactions where European and Asian clients were seeking to privatize their real estate platforms. The acquisition of the German residential company, GSW, the $4 billion takeover of hospitality company Kerzner International and the real estate portfolio of retailer KarstadtQuelle AG in Germany, are attributed to its reach and investment banking contacts. The other advantage it enjoys is that Goldman will often be retained as financial advisor for the financing or refinancing of transactions. Of course, Goldman expects a fee for this. According to the PPM, one percent of gross financing proceeds typically go to Goldman Sachs in the form of fees.

“[Goldman] likes to buy in bulk, restructure the investment and use it as a trading platform.”

One US lawyer, who has worked on many deals sponsored by Whitehall, adds: “They are very sharp, always very well organized, really good market intelligence on what market is for financing. Always very professional – you know you're dealing with a Goldman Sachs team of people. Always positive. I think very highly of the operation.”

Of course, size isn't everything in real estate, but during its 17-year history, Goldman's real estate operations have excelled at taking down large investments, often in complex situations. As one market participant observes, its large capital base enables the firm to “control pricing,” particularly in an auction process. A former Whitehall executive says that what sets Goldman apart is that it mainly goes for “big ticket deals” rather than the more diversified strategies such as buying single assets or minority stakes in developers. “It likes to buy in bulk, restructure the investment and use it as a trading platform,” he says.

A number of Whitehall insiders and rivals refer to REPIA as a momentum player, choosing to enter a market because of encouraging economic factors. On the whole, it has been served well by the approach, leveraging the bank's global presence and relationships. “It was all about franchising the brand – in as big a way as possible, as quickly as possible,” says a former employee.

“Whitehall does everything large, big and crazy,” says another senior real estate professional, who worked alongside the firm. Another adds that REPIA are “trend players,” planning a strategy around a real estate market rather than just at asset level.

All through the credit crunch, Goldman has been proving its ability to just “do it” with big-ticket items. The firm recently bought German residential property company, LEG, for €787 million ($1.2 billion) and a large Moscow development reportedly for $300 million. In May, REPIA paid $1 billion alongside US development firm, The Related Companies, for the rights to develop 12 million square feet at The Hudson Rail Yards in Manhattan, after Tishman Speyer pulled out the project. It is billed as the last remaining undeveloped parcel of land in Manhattan.

Scale, scope and complexityREPIA prides itself on taking down large, complicated deals. Here we highlight some recent ones.France TelecomActing as part of a consortium, REPIA acquired a portfolio of 410 assets from the partial state-owned French telecom company for$2.4 billion through its Whitehall 2001 fund. Its equity investment was $174 million. According to the PPM for Whitehall StreetInternational Real Estate 2008, the deal was the largest real estate transaction in France at the time. In 2004, REPIA executed a€1.2 billion securitization of the technical asset portfolio, allowing Whitehall to return the majority of the equity invested in thedeal. The portfolio was later sold for €1.6 billion. Overall, according to REPIA, the investment generated an “in-place investmentlevel” IRR of 36 percent.Kerzner InternationalInvesting through the Whitehall 2005 fund, REPIA partnered with a consortium to acquire the outstanding shares of the resortoperator, Kerzner, for a gross purchase price of $4 billion. Kerzner owns resorts such as the Atlantis and One&Only, in the Bahamas,Dubai, Mexico, the Maldives and Mauritius. According to the Whitehall PPM, the strategy is to continue operating and expanding thecompany over the next five years before exiting the deal.South WindIn the early 2000s, REPIA saw a vast opportunity in troubled golf courses in Japan which were struggling under a mountain ofdebt. Investing through the Whitehall 2001 fund, REPIA, in partnership with Goldman Sachs and a third party, created the SouthWind sponsor entity which would turnaround one of Japan's leading golf course companies, Nitto Kogyo. After assembling a largeportfolio of golfing assets, REPIA later rebranded South Wind as Accordia Golf. The portfolio was refinanced in 2005 and Accordiataken public, with Whitehall selling 52.9 percent of the shares and retaining a partnership interest of 22 percent. The investmentgenerated IRRs of 52 percent.Tiffany GinzaInvesting through its Whitehall International 2005 and Whitehall Global 2007 funds, REPIA acquired the Tiffany's flagship store inTokyo in 2007. The upscale US jeweler, which bought the property in 2003 for a reported $140 million, continues to lease part of thebuilding, believed to be 30 percent of the total area.GSWThe 2004 acquisition of the German state-owned multifamily company, GSW, in a joint venture with Cerberus, saw REPIA purchaseone of Berlin's most extensive apartment inventories. Developed over the past 80 years, GSW, previously owned by the Berlingovernment, now has a portfolio of around 70,000 apartments. In 2005, REPIA was able to refinance the portfolio resulting in 140percent of the equity invested being returned to investors. According to the PPM, the investment has an IRR of 31 percent on an equityinvestment of $275 million.Canary WharfREPIA was part of the consortium that acquired the property and development company, Canary Wharf, in a $2.3 billion take-private.The consortium also included Simon Glick, a New York diamond and property magnate, Morgan Stanley Real Estate, the Governmentof Qatar, Prince al-Waleed bin Talal and British Land. Investing through its 2001 fund, Whitehall says in its PPM the deal was oneof the largest take-private real estate transactions in the UK at the time, “illustrat[ing] our ability to take advantage of Whitehall'sexperience in structuring complex transactions.” By mid-2007, the market value of REPIA's equity interest had appreciated more than100 percent and more than 100 percent of the original equity had been returned.