SPECIAL REPORT: Contemporary art (of the deal)(2)

By buying parts of Deutsche Bank Asset Management, including RREEF Real Estate, Guggenheim Partners could quadruple in size – earning the firm a place among the industry’s all-time deals. PERE magazine, April 2012 issue

One might argue that there are few surprises left in real estate, or even financial services, nowadays given the shocks that the credit crunch and ensuing global financial crisis provided. Still, one certainly arrived recently. 

At the end of February, Guggenheim Partners, a relatively low-key New York- and Chicago-based diversified financial services firm founded in 1999, was announced to be in exclusive talks with Deutsche Bank to buy several parts of its asset management division, including RREEF Real Estate. The surprise element came because Guggenheim was not linked with the sale process when Deutsche Bank first announced its intentions in November. 

The firms that were linked to the sale of Deutsche Bank Asset Management were less surprising. After all, JPMorgan Chase, Wells Fargo and State Street have the balance sheets to swallow the massive division and are much better known.

Most people within the real estate industry think of the deal as a ‘reverse takeover’, given that Guggenheim with $125 billion in assets under management (AUM) is clearly smaller than the sum of the parts Deutsche Bank is selling. This has given rise to curiosity as to how Guggenheim will be financing the acquisition, which reportedly has a price tag as high as $2 billion for a business with $400 billion in AUM. They ask whether a mystery backer has yet to be revealed.

In response to PERE’s questions, a spokesperson for Guggenheim issued the following statement, which hasn’t shed much light on the proceedings. “We are pleased to enter into exclusive negotiations with Deutsche Bank and believe its asset management businesses represent an attractive opportunity for Guggenheim to leverage our expertise.” The firm declined to offer any additional comment beyond that. 

Guggenheim might not be a regular on the pages of the Wall Street Journal or the Financial Times, but it certainly has raised its profile in recent years – and it has its fans. John Cahill, a partner in the real estate practice of the law firm Paul Hastings, said: “Guggenheim Partners is a hell of a player. They’re just quiet and discrete; they don’t swagger around. Because they’re not in the limelight all the time, they’re overlooked.”

Still, clues to Guggenheim’s ambitions have been there for all to see. In February 2010, it agreed to buy Security Benefit, whose holdings included an asset management business with $22 billion under management. In July 2009, it bought Claymore Group of Lisle, Illinois, which oversaw $12.9 billion in exchange-traded funds. 

Furthermore, if college campuses are anything to go by, Guggenheim is looking to staff up, with aggressive recruitment drives in full swing. In addition, the firm announced last month that it has hired Apollo Global Management’s former chief operating officer, Henry Silverman, as vice chairman of its investment management business. Based out of Guggenheim’s New York office, Silverman will advise the firm on expanding that business.

Even with Ed Shugrue spinning out Guggenheim Structured Real Estate Advisors at the end of last year, Guggenheim still has a decent real estate platform. Based out of Boston, Guggenheim Real Estate was established in 2001 and invests across a wide spectrum of the real estate market, including direct real estate, REIT securities, private funds and commercial mortgage-backed securities. It also has the Guggenheim Real Estate Plus Fund, a fund of funds division based out of New York. The next question will be how these businesses fit with RREEF.  

Clearly, RREEF Real Estate is just one element of the business Guggenheim is buying. But at $41.9 billion in assets, it is a big chunk to swallow nevertheless, so there is little wonder why private equity real estate folk are watching with interest. 

If the deal goes through and Guggenheim retains all the businesses for sale, it would be a transformational event for the firm. In terms of real estate, it would wind up being one of the largest investment managers in the world overnight, and the wider corporate transfer would see Guggenheim quintuple in size. 

Such a masterstroke would belong in a museum for modern-day deals. 

In the news
Used to flying under the radar, Guggenheim has been getting attention in recent times. Here is a sample of some of its noteworthy moves:

June 2009: Hires former Bear Stearns chief executive Alan Schwartz as executive chairman to focus on transforming its existing broker-dealer capability 

July 2009: Buys Claymore Group of Lisle, Illinois, which oversaw $12.9 billion in exchange-traded funds

February 2010: Agrees to buy Security Benefit, whose holdings include an asset management business with $22 billion under management

March 2012: Hires Apollo Global Management’s former chief operating officer, Henry Silverman, as vice chairman of its investment management business