News Analysis: Macquarie

 If you’re an Australian bank looking to get into the US mortgage securitisation business, how do you do it?

Step one: hire several experienced professionals from banks who have experience in sourcing and managing commercial mortgage-backed securities, and are eager to change employer. Step two: partner with a US-based firm that has been in the mortgage origination business for some time.

Or at least that’s what Macquarie, the Australian bank and investment management firm, has opted to do. The firm already has a strong asset management footprint in the US, albeit not in mortgage securitisation.

In September, Macquarie announced it was joining forces with Principal Real Estate Investors, the real estate arm of Des Moines, Iowa-based Principal Investment Group, to originate, structure and manage CMBS offerings. Having already hired several senior people from banks to work on the effort over the past three to six months, the new venture called Principal Commercial Capital was now ready to be unveiled.

This marks the Australian bank’s first foray into mortgage securitisation, although it has participated in CMBS trading in the past. Macquarie also already makes balance sheet investments in the commercial mortgage space through its Corporate and Asset Finance group. The firm has a large traditional fixed-income business with $180 billion in assets in North America through Delaware Investments, which acquired in 2010. It also handles a variety of other alternative and traditional strategies in the US and Canada.

Principal, meanwhile, has been involved in CMBS since 1999 and now oversees $16 billion in the segment. The real estate group overall manages or advises on $52.6 billion in commercial real estate assets, including public and private equity as well as alternative lending. The real estate arm is part of the broader Principal Investment Group, which manages $311 billion across a variety of public and private, traditional and alternative assets and strategies.

Timothy Gallagher, a former Goldman Sachs banker who joined Macquarie from Morgan Stanley in June, told PDI that Principal’s expertise in the space was an attractive asset to Macquarie. “Principal has experience in origination, underwriting, servicing and closing these deals and all the skills you need to execute this business,” he says, adding that many of the team members at Principal have worked together on CMBS transactions for many years.

Phil Miller and Charles Citro have also come on board as managing directors. Miller was previously head CMBS desk strategist at Morgan Stanley and an originator at Merrill Lynch before that. Citro was a managing director at Goldman. Stephen Schwartz also joined as a senior vice president at Macquarie from RBC Capital Markets, where he was head of CMBS Trading. Conor D’Alton was hired as an associate in CMBS trading from Barclays, where he was in securitised product sales.

Commenting on Macquarie’s ability to hire talent from the big Wall Street firms, Gallagher said: “The fixed income groups at the banks have been shrinking and it’s a difficult position to be in right now.”

As a result, bankers have been leaving of their own: “It’s a personal choice that people are making.”

Executives at both Macquarie and Principal will work on originating and structuring the deals. “We’ll both have skin in the game and be bringing our strengths to the table,” says Margie Custis, managing director at Principal.

The group will focus on office, retail, multifamily, industrial and hospitality properties. Gallagher thinks the commentary about the mortgage market overheating all over again is largely overblown. “We’ve done an analysis of the market and how it looks relative to 2007 and there is still something like $75 billion in capacity that’s gone,” Gallagher said, explaining that many of the large banks that used to play in the space have withdrawn from the market or disappeared altogether.

“There are many smaller new lenders out there, but the number of big lenders is fewer.” he said, adding that the group hoped to be in the top 10 among CMBS originators going forward and would look to do $1-$2 billion in deals per year, with about a deal per quarter.

Custis said Principal’s experience in managing CMBS strategies should help it avoid shoddy mortgage deals. The new platform will focus on all major property types nationwide, with loan terms typically in the 5-10 year range and loans of $5 – $100 million. Principal has already contributed almost 2,000 loans across 50 securitisations.

Macquarie and Principal’s CMBS partnership isn’t the first deal of this sort. Perella Weinberg, a boutique alternative investment firm that was founded by three Goldman Sachs alumni in 2006 and now has $11.2 billion in assets under management, partnered with Prudential Mortgage Capital Company for CMBS management in 2011. At the time, Prudential Mortgage Capital was managing $65.6 billion in these strategies at the time.