SPECIAL REPORT: The making of a powerhouse

With the purchase of ING REIM in the queue, Los Angeles-based CBRE Investors is set to become the world’s largest real estate platform. PERE Magazine, February 2011 issue.

Matt Khourie, chief executive officer of Richard Ellis, only joined the Los Angeles-based real estate investment management firm in 2009, but it already is looking like inspired timing. Within weeks, he could be at the helm of what is set to become the largest real estate investment manager on the planet with more than $100 billion of assets under management.

Last month, the parent company of CBRE Investors, CBRE, reportedly was in exclusive talks to buy the majority of ING Real Estate Investment Management (REIM) from the Dutch banking and insurance group ING in a goliath transaction. At press time, sources confirmed that CBRE was pressing ahead, and a statement announcing terms of an agreed deal was rumoured to be imminent. 

Such a transaction has repercussions for staff at both companies – Khourie included – in the US, Europe and Asia. Some senior staff will get bigger roles, while others will have reduced influence or leave. It also is a huge event for limited partners in ING REIM’s funds, thanks to the change of control. Similarly, joint venture partners and lending banks across the world will have a new relationship foisted upon them.

Mega bolt-on
There are clear reasons why CBRE would want to buy ING REIM. The Los Angeles-based firm has a juggernaut strategy to be a market leader in its chosen business lines. It certainly has achieved that with its global real estate brokerage unit, but not with CBRE Investors to date. While CBRE Investors is of considerable size, it certainly is not a number one or even number two.

To provide some context, CBRE Investors manages a total of $35.7 billion of assets under management. That is less than half the size of ING REIM, with its $86.6 billion in assets under management. It also is smaller than rivals such as UBS Global Real Estate ($54 billion), Morgan Stanley Real Estate Investing ($45.6 billion), and LaSalle Investment Management ($44.6 billion) to name but a few. However, by swallowing ING REIM, it can become the 900-pound gorilla. It would be ‘mission accomplished’.

One person familiar with CBRE as a firm said the bottom-line benefit of buying ING REIM was clear. Fee income from CBRE Investors would suddenly contribute half of all revenue, he said.

ING REIM is actually a business of three component parts: the ING REIM Funds business, ING Clarion Real Estate Securities and ING Real Estate Select. ING Funds is the primary entity, while ING Clarion and the Select multi-manager business are much smaller, with $17 billion and $6.4 billion in assets, respectively.

CBRE Investors has exactly the same three business lines, so it seems an obvious fit. At press time though, there were strong rumours that ING Clarion Real Estate Securities, which is based in New York, is not part of the deal. Instead, it is thought that senior management is leading a buyout of that group. But even if the securities business is not part of the deal, CBRE Investors would be buying a company with $70 billion in assets under management, easily enough to catapult it to the top.

According to well-placed commentators, the prize of ING’s Funds business is arguably ING REIM Asia. Though only a small contributor to the overall platform at present, ING REIM in Asia is a hard-to-replicate business in a part of the world offering significant growth prospects. Richard Price is regarded as a strong leader, and the performance of the Asia fund is said by one former ING executive to be very good. “Even though it is a small part of the business, ING REIM Asia probably has the highest growth component,” the former ING man added.

After that, the continental European business, currently led by Pieter Hendrikse, is clearly very attractive to a US organisation looking for a bigger footprint. At the start of the year – and before news of exclusive talks became public knowledge – senior European managers crossed the Atlantic to meet the CBRE team. A source that recently spoke with present ING employees in Europe said it looked as though CBRE was taking a “pragmatic” approach to filling senior positions, meaning CBRE was selecting the best candidates for each overlapping position in each region. For example Stephen Furnary, chairman and chief executive of ING Clarion in the US, is being tipped for a senior role.

The strategic fit between the two companies is interesting because ING REIM is mainly a manager of core, core-plus and some value-added funds, although it does have some country-specific higher return vehicles such as its ING China Opportunity Fund, ING Clarion Lion Mexico Fund and ING Real Estate Iberian Value-Added Fund. ING REIM did try to build out a global opportunistic platform two years ago, but it didn’t work out.

CBRE Investors is considered to be more of a value-added player via its Strategic Partners series, although it also has lower risk strategies and an opportunistic offering through CBRE Capital Partners. They are both considered quite similar culturally, with strong risk management approaches rather than swashbuckling styles.

While the Asia platform might be a prize and the firm has a number of highly rated people, experts also point to ING REIM’s remarkable investor base as a huge attraction. Indeed, the firm has a vast number of LP relationships, but PERE understands that traditionally the most important have been the Abu Dhabi Investment Authority, Government of Singapore Investment Corp, Algemene Pensioen Groep, PGGM Vermogensbeheer and the New York State Teachers’ Retirement System.

Beyond those relationships, smaller investors in Europe include TKP Pensioen, ATP Real Estate, CNP Assurances, Stichting Pensioenfonds Zorg en Welzijn, the Finnish Local Government Pensions Institution (KEVA) and the Tapiola Group. In the US, ING REIM has relationships with pension plans such as the Los Angeles City Employees’ Retirement System, Alaska Retirement Management Board, Contra Costa County Employees’ Retirement Association and Arkansas Teacher Retirement System. There are many more besides.

CBRE Investors certainly will be looking forward to accessing a new investor base in the hope they will sponsor new funds.

Communication and concerns
The next few weeks, however, will be crucial as CBRE Investors is expected to meet with ING REIM’s most important investors as part of a charm offensive. This is arguably when the really hard work starts and the complexities emerge. Each LP will have its own agenda and set of concerns or questions about the change of control.

ING has communicated very little to LPs so far on any details of the transaction, according to LPs that PERE has contacted. One major LP said: “We have been informed by ING that they were conducting a strategic review of the REIM business, and that’s about all we have heard.” 

Yet, there are some indications that LPs are impressed by ING’s handling of the process in these early stages. One client of ING felt able to draw favourable comparisons to the way Citibank handled the sale of Citi Property Investors in 2008. In that instance, the investor said, Citibank seemed a little less concerned with preparing LPs for such a major event as a change of control. “We weren’t treated properly,” he added, noting that The Blackstone Group’s placement agent and advisor, Park Hill Group, became the LPs’ representative in response.  

In contrast, the investor argued that ING deserved credit for the way it had “prepared” for the situation. Each fund has its own documentation containing terms and conditions providing for a replacement general partner or investment advisor, but the overall logistical task of prepping limited partners remains a challenge.

Recognising this, the investor believes ING is being straightforward. “It has been clear and upfront with investors – certainly what you might call its top 15 – about what it is doing, which is evaluating the sale of the business,” he said. “I know that ING is preparing for the sell-off and that investor clients will be informed very carefully of the proceedings.”

If that view is representative of how LPs are receiving ING’s approach so far, then the firm should feel at ease when it becomes time for a LP vote. Still, some LPs undoubtedly will harbour concerns about alignment of interest, as one might assume given a change of control.

One big issue has to do with how ING’s insurance business is a significant investor in many of ING REIM’s European funds. In fact, it is a cornerstone investor. The issue is what happens to its stakes and how will CBRE align itself with investors?

Options may include CBRE buying out the investments or perhaps coming to an agreement with ING to keep the money in the funds for a certain period of time. In fact, ING has committed to the European Commission to divest its global insurance unit by the end of 2013, so there will need to be a change at some stage anyway.

For now, one investor asked: “If some or all of the sponsor stakes in Europe remain at ING and are not part of the sale, how is the new manager aligned?”

PERE is told by a former ING employee who knows the inner workings of REIM that ING Bank is the entity that provided the seed capital for the REIM business to grow around the world. According to him, ING Bank had invested around €1.5 billion in the business by the time the credit crunch arrived. Given the fall in values since then, perhaps ING Bank’s investment in REIM would now be valued closer to €1 billion, which is what CBRE might have to pay to ING Bank.

Alignment of interest won’t be the only point of discussion between ING’s LPs and CBRE Investors. Staff retention also will be debated.

Explaining the issue, one investor said: “The most important downside risk for us is if key people are not happy with the takeover by CBRE Investors, should that occur. One can imagine they will leave.” Furthermore, as with any large-scale merger, a significant number of staff cuts could be on the way, particularly given that ING REIM employs 1,500 people.

This concern is particularly acute in Europe because the senior management of the funds there have tended not to invest their own money alongside that of the sponsor and third-party investors. It is different at ING REIM in Asia and ING Clarion in the US, where PERE has been told that ING provides loans to senior managers for them to co-invest in its vehicles.

Having a say
Private equity lawyers seem clear that LPs are likely to have a say in the process. Roger Singer at Clifford Chance in New York said almost all limited partnership agreements had some protection regarding a change of control of the general partner.
Recent examples of LP approval reputedly include the transfer of Bank of America Merrill Lynch’s platform in Asia to The Blackstone Group, the spinout of Peakside Capital from Bank of America Merrill Lynch in Europe and the transfer of management contracts to Silverpeak Capital Partners for the three global opportunity funds sponsored by Lehman Brothers Real Estate Private Equity.

This, of course, can introduce a whole new level of complexity to the process, especially if the LPs are unable to act collectively. Whether a vote is required generally depends on the wording of the partnership agreements, but it also can hinge on the way the transaction is structured – i.e., whether a firm buys the GP or the owner of the GP or whether the GP withdraws and another is inserted. These are the kind of issues lawyers will need to grapple with.

In some cases, the fund or the sponsor itself will pay for some limited-scope representation by a law firm to help herd LPs together, but it is inevitably a tricky task dealing with issues such as prioritising the comments of one LP over the comments and concerns of another.

Most of the platform sales and transfers to date have taken a lot of time to reach completion – more than a year and a half in one case – so one can only imagine the time, effort and resources CBRE and ING will need to put into this transaction.
It is not only investor consent that will need to be dealt with, but the approval of lending banks and joint venture partners as well. ING and CBRE will be working on identifying partners that may require ‘encouragement’ to approve a change of sponsor, which may present an additional cost.

All that said, where there is a will, there is a way. The smart guys at CBRE will know all about the complexities of taking over an investment management platform, as it has managed complex corporate takeovers before. For its part, ING has very strong and up-to-date data on all its clients, which should make it effective at communicating everything required by the process. 

If both companies manage the sale well, the combined firm will become the largest real estate investment manager in the world. That is a prize worth working for.