EUROPE NEWS: As good as Goldman(2)

James Garman, co-head of real estate at Goldman Sachs, told delegates at the PERE Summit: Europe how the bank is gearing up for a European debt fund, how it just struck its first equity deal in three years and how it is approaching life under the Volcker rule. PERE Magazine July, August 2012.

PERE: What is Goldman Sachs’ current investment strategy?

JG: Our investment strategy has been evolving over the past couple of years as the opportunity has been unfolding. Our plan is to continue with our opportunistic equity business, which one could call the classic REPIA (Real Estate Principal Investment Area) business, but we have added a second leg, which is a credit strategy.

In the last year, we have put out more than $2 billion of capital from our platform. Pretty much all of that has targeted the US, with 70 percent coming via our credit strategy. We have been relatively more optimistic about the opportunities in the US and more quiet and cautious in Europe. Then again, even in the US, the opportunities we have seen have been more interesting in the credit business than in the equity business.

All that said, I think that is changing. We are now seeing more interesting equity opportunities and growth emerging in some sectors in the US and, in Europe, we have just closed our first equity investment after three years on the sidelines. We also have plans to bring our credit product to Europe as well.

PERE: Debt funds certainly seem to be all the rage in Europe. How has the bank been approaching debt in the US?

JG: We raised $2.6 billion for a real estate credit fund a couple of years ago, for which we target returns of 7 percent to 10 percent. We are not trying to compete with the senior lenders on core assets or the riskier mezzanine lenders, rather we are trying to play the middle. This has allowed us to be a senior lender in more transitional assets where we see some turnaround while taking more junior positions in high-quality assets.

It is a strategy that has been going very well for us. Our investors like it because many want to be in credit rather than equity, but they want to receive more current yield than they might achieve in pure senior debt.
PERE: Banks in particular have been a target of regulators. How is your firm feeling about regulations such as the Volcker rule, and how is it shaping your business?

JG: Although the broad legislation has been passed, the details have yet to be written, which makes it difficult to comment because we don’t know what the rules will look like yet. That said, we have historically run our real estate, private equity and infrastructure businesses with large commingled funds, where the firm traditionally would co-invest between 20 percent and 30 percent. Across those three business lines, we run about $49 billion of equity and are managing our existing funds to come into compliance with the Volcker rule over time.

Going forward, particularly for our real estate business, we are going to fund these strategies through funds that work under the new legislation or simply make investments using our own capital, often alongside clients of the firm.

PERE: People have written off Goldman Sachs, especially its classic Whitehall opportunistic fund series, citing numerous departures from the platform. How do you reply to those people?

JG: It has been a difficult time for anyone running an illiquid leveraged asset class, and we also had changes in our platform that were inevitable post-global financial crisis. The team at its peak was around 140 people, but today we are closer to 40. Still, we have kept together a strong talented group to redesign and implement our new investment strategies, as well as drive value in our existing portfolio. The team also gets huge support from our Archon platform in managing the assets.

We operate about $40 billion of property, split primarily between the US and Europe, and what we own is located predominantly in markets that have had some recovery since the crisis. We have restructured or refinanced about $10 billion of debt. We still have one or two things to sort out, but the vast majority of what needed to be done is now complete. Behind the scenes, we also have leased or renewed around 20 million square feet of tenant space in Europe, sold about $6 billion in assets and made meaningful distributions to investors. Given where we are today relative to how things looked back in 2009, we are actually very pleased.

PERE: How does Goldman Sachs view Europe as a place to invest?

JG: In Europe, we’ve been focusing on two types of opportunity in our equity business. The first is repositioning and trading opportunities in markets where we see some signs of strength and liquidity despite all the turmoil. I would include London, Paris and Germany in that category. The other area we’ve spent a lot of time on is some of the more distressed markets, such as Spain and Ireland.

Ultimately, we think Europe’s economic problems will be solved, but it will take several years. We have to learn to live with it and embrace it in a way, as this turbulence can give rise to opportunities.