Recent trends in real estate: Acquisition of management platforms
By Ian Ivory and Sam Narula, partners in the London office of BCLP – A recent trend in the commercial real estate sector has been the acquisition of fund and asset management platforms by investors. Whilst not a new concept, traditionally real estate investors have typically favoured a more classic deal structure by which they acquire a portfolio outright (either alone or via a joint venture or consortium), or alternatively by investing into a fund as one of several passive limited partner investors.
There are now a couple of recent high profile examples in the market of direct acquisitions of management platforms. Oxford Properties Group, the real estate arm of Canadian pension fund OMERS, recently acquired European investment and asset manager M7 Real Estate. The EUR51 billion real estate investor said it was making the acquisition as part of plans to deploy GBP3 billion into multi-let industrial and urban logistics across Europe. M7 Real Estate, which manages about EUR4 billion of assets on behalf of third-party investors, will continue to operate as a standalone business. This isn’t the first fund management business acquired by Oxford Properties. In 2018 it acquired the Investa Office Fund in Australia and in November 2020 bought a stake in Investment Office Management Holdings.
Meanwhile Stockholm-based EQT AB has signed a deal to acquire Exeter Property Group, a global real estate investment manager with more than USD10 billion of assets under management, for a total consideration of USD1.87 billion, comprising new EQT AB shares worth USD800 million and USD1.070 billion in cash, including refinancing of USD300 million of existing Exeter debt. The consideration is reported to equate to a mid-teens EBITDA multiple. EQT AB will acquire 100 per cent of the Exeter management company and 25 per cent of the right to carried interest in selected existing Exeter funds. In addition, EQT AB will be entitled to 35 per cent of the carried interest of future funds.
Looking slightly further back, a team at our firm was involved as legal advisers on the formation of joint venture company Resolution Property Investment Management between Fosun Property and Resolution Property, creating Fosun’s exclusive investment manager to invest in value-add real estate opportunities in 14 countries across Europe. Fosun Property is the global real estate investment & management platform of Fosun Group, a leading investment group from China.
For the manager, such transactions potentially gives them an aligned cornerstone investor for each fund they raise plus scale and access to a greater pool of capital, which can be significant as the sector continues to evolve with new real estate technologies, e-commerce, evolving supply chains and smart buildings. For the investor, these transactions provide diversification into new asset classes and geographies, exposure to another part of the value-chain via fee income and a share of the carried interest as well as the addition of new management team expertise and a more guaranteed pipeline of assets. The manager will also bring with it relationships with its existing fund investors, which can be particularly significant in new territories where it is desirable to team up with local partners.
Typically these transactions will be structured using a mixture of cash and non-cash consideration and any share consideration will be subject to a lock-in period to keep and incentivise management going forward. Depending on the deal size they will also be subject to usual completion conditions, including regulatory and competition/anti-trust filings and clearances.
In the real estate sector the fund manager role itself involves managing the portfolio assets on behalf of others, making investment decisions, maximising value and dealing with downside risks. In a real estate context this can be complex and specialised work given the physical nature of the assets, the risks of damage and deterioration over time and the intricacies around construction, development, financing, insurance, letting and selling and so on, plus the complex taxation treatments that usually overlay all of this. The asset manager role is distinct from that of a real estate property manager, who handles the day-to-day activities relating to a property's operations and physical structure.
As with most fund structures, the manager receives a fee from the fund vehicle (traditionally a limited partnership). This is usually formed of annual fees based on the size of investor commitments, assets or net assets of the fund, fees for specific transactions, and fees (carried interest) based on the performance of the fund. The manager is often referred to in business jargon as the general partner of the fund, but in reality the roles are different and the general partner is often a wholly-owned subsidiary of the fund manager and ring-fenced as a special purpose vehicle company with few or no assets of its own. This is due to the fact that the general partner has unlimited liability for the debts of the partnership fund. For this reason each separate fund will have its own general partner, so as not to run the risk of cross-default across different funds, whereas the fund manager may be engaged to advise multiple funds at any one time.
With intense competition amongst investors, easy access to funding and a widespread appetite for new ways to invest, it is likely that the trend to acquire management platforms will continue to grow in the sector as we emerge from lock-downs and the market adjusts to life in a post-pandemic environment.