Real estate Q&A: Partnering with an operating business

Posted by Macquarie Asset Management

This article was first published by PERE in October 2021 and is reproduced here with permission.

Partnering with an operating business provides access to real estate and can boost investment performance, say Jelte Bakker and James Kemp

The global real estate investment landscape has never been more competitive, as institutional investors continue to raise their allocations to the sector. However, partnerships with entrepreneurial operating platforms give investors access to a strong pipeline of prime assets, with opportunities to invest in these platforms if you have the right resources and experience, say Jelte Bakker, Global CIO Opportunistic Real Estate and Head of Asia-Pacific, and James Kemp, Head of ANZ Real Estate and Head of investments Asia-Pacific, at Macquarie Asset Management. 

Why are real estate investors partnering with operating businesses?

Jelte Bakker: Large investors increasingly recognise that partnering with specialists on the ground gives them better access to real estate deals. The environment globally is getting more competitive and liquidity has never been greater, so to get access to a business which can create real estate or has superior access to real estate is valuable. While investing in or developing a quality real estate portfolio is the primary focus, it is not lost on most large investors that a partnership with a specialist group can be a real win-win. The access to capital at scale allows a specialist real estate group that creates high-quality real estate to build real value in the business. We have seen over the last few years that investors that are seeking to deploy substantial capital in partnership with a specialist group would also like to invest in these businesses, looking to secure access to real estate and also participate in that value creation.

James Kemp: The challenge for most investors is that it is daunting moving from a pure investment role to making business decisions and accepting different risks that come from investing in an operating platform. Being able to adequately perform the role of shareholder in what is often a quick moving and agile operating business can be quite distinct from underwriting real estate.

How can operator partnerships boost performance?

Jelte Bakker: Investing in a successful operating business can drive investment value upon exit, but also generate better investment outcomes more broadly. In these partnerships, most of the capital is invested in the real estate, which is the key driver of value. Our focus is on gaining access to an attractive deal pipeline, by providing an attractive solution to the operating platforms that have access to deal flow and want to partner with us. Access to expertise and a deal or asset pipeline is crucial to generating better investment outcomes.

What do you look for in an operating company?

James Kemp: This strategy is driven by unlocking the real estate, so we assess platforms for their sourcing and asset creation capabilities. We are particularly interested in sectors that have structural tailwinds, such as the growth of e-commerce, data consumption, demographics or sustainability. The sectors that benefit from some of these tailwinds, like logistics or rental residential, are highly sought-after, so competition for assets is intense. We almost always look to partner with and invest in groups that are sector specialists. A singular focus often gives these businesses an edge in delivering superior outcomes for investors and their underlying tenant customers. Then there are the softer components, which are equally important to delivering value. We look for management teams with ambition, and which are looking to add to their business with the capabilities and institutional relationships that we bring, in order to drive significant expansion.

Jelte Bakker: We often invest in early-stage businesses or even help establish them as co-founder. We partner with management teams that in their careers have long-term experience of accessing and developing institutional quality real estate at scale. Our capabilities to support these businesses combined with our access to capital are aspects that are complementary to the real estate expertise the management team brings.

How are investments typically structured?

Jelte Bakker: We focus on ensuring there is strong alignment of the key stakeholders. If real estate investors get a good outcome, it should also lead to a good outcome for the business, its shareholders and employees. Our role is helping to create an environment where the management team is enabled to focus on the real estate – sourcing, development and management. We help the business with setting long-term goals and seek to ensure that the business is set up to achieve them. The business will need a balance sheet, the right resourcing and governance structure, and, of course, access to real estate investor capital. Ultimately, even though we spend significant time and resourcing on our partnerships with specialist groups, typically 90 per cent or more of our capital gets invested in underlying real estate. We strive to ensure that our investment structures reflect this, giving us every chance to maximise the value of the real estate while minimising downside outcomes.

What makes these partnerships thrive?

Jelte Bakker: One of the essential elements for a partnership to be successful is to align yourself with the management team. We want to help the business grow and become better as a result of our participation. Therefore, as well as providing working capital, we help the management team improve their business in different ways, if or where required. Typically, they have the real estate expertise and this is where they want to spend all of their energy. Often everything else around them is not well-developed. We help with those things that make a business an institutional business, such as setting and implementing long-term strategy, staff engagement/alignment, governance, risk management, compliance, financial reporting, sustainability, health and safety and access to capital. We are also able to share our global experience and learnings from other markets, which the management teams can apply in their businesses.

James Kemp: Our focus on those aspects of the business frees up management to focus on providing real estate solutions. This partnership removes the pressure on management to ‘catch up’ on the operational infrastructure which can accelerate the growth of the business. Our focus on areas such as risk management, safety and compliance also provides protection and enhancement of outcomes for the investments we are making in the real estate managed by the platform. Our focus on enhancing these areas also positions the platform to attract other institutional investors to invest with the platform earlier in its life cycle, again going to an acceleration of growth.

What are the risks for real estate investors?

James Kemp: Investing in the operating platform alongside the real estate can be a totally different proposition in terms of risk management than simply investing in the real estate. Sitting on the board of a company which is doing development and funds management, potentially in both developed and emerging markets, requires a significantly different risk appetite for investors and skillset for their team members. Outside of the risks in effectively managing this type of investment, where this investment strategy ultimately goes wrong is if the investor is not fully aligned to the same success the management team see for their business.

Jelte Bakker: A misalignment between the management team in the business and the partner or the investor in the platform can lead to issues at the underlying real estate level, which invariably leads to an enormous amount of resources being used to resolve them. That is why experience in partnering with entrepreneurs is so crucial.

Jelte Bakker

Jelte is Global Chief Investment Officer, Opportunistic Real Estate, and Head of Real Estate in Asia-Pacific for Macquarie Asset Management. He started his career at Macquarie and now has over 19 years of experience.

James Kemp

James is Head of Real Estate in ANZ and Head of Real Estate Investments in Asia-Pacific for Macquarie Asset Management. He has 15 years of real estate, investing, funds management and corporate finance experience across Asia-Pacific. 

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