After years of being sidelined, PE firms may be finding their way onto the real estate field with the help of senior industry free agents
5 MIN. READ
Probably the most significant industry personnel news item in the last half of 2021 was the announcement that the head of all real estate lending for the largest bank in the United States had left that position to launch their own investment company with an initial infusion of funding from an unnamed private equity backer. Many in the industry were shocked that this executive, who by all accounts had reached the pinnacle of success in their career, would leave such an important role to establish a real estate PE start-up, but it didn't surprise me or my colleagues one bit. We’ve been watching similar stories play out in our executive search practice for the past year, and we anticipate more of these moves in 2022.
Senior Executive Non-Owners and the Roots of "Free Agency"
Back in early 2019, discussions about potential search opportunities with private equity firms planning to establish new real estate investment vehicles became a staple in my company's weekly executive meetings. The leaders of these groups felt that the record-setting, decade-long economic recovery was surely reaching its inevitable end, asset prices would begin to drop, and the time had finally come for them to deploy their (also record-setting) reserves of dry powder. On the surface, this was nothing new: industry experts had been sounding some version of the "Winter is Coming" alarm since as far back as 2013, and with every year-end prediction of an imminent downturn frustrated investors eagerly awaited a wave of buying opportunities. What was different in 2019 was the scale at which many of these PE companies were planning on entering the market, and what they were targeting: not distressed single-asset or small portfolio deals, but core and value-add regional portfolios and even entire operating companies.
At the same time, our team was hearing in daily conversations with senior executive non-owners a chorus of interest in actively exploring their career options; specifically, they wanted to be kept apprised of potential roles with new ventures backed by private equity or institutional investors. While this was certainly not the first time we encountered professionals seeing career opportunities in the chaos of an impending economic downturn, this, too, was different in both volume and tone. Typically, employees of all levels become much more risk-averse to making changes as economic uncertainty increases (no one wants to be the last hired-first fired).
Then came 2020 and the arrival of the global COVID-19 pandemic in the United States. Except for a spike in interest regarding acquisition talent during the 2nd quarter (when many believed the "Coronavirus Crash" of the stock market in March would leave institutional investors suddenly overweight in real estate allocations and needing to shed high-grade assets to rebalance their portfolios), conversations about strategic hiring quieted down as the industry joined the Great Pause ... for about six months. Whether industry leaders determined that the underlying macro trends upon which their long-term business plans were based would continue despite the pandemic (or even be accelerated by it), they identified new opportunities created by the crisis, or they simply became impatient watching and waiting, our executive search activity began climbing again toward the end of Q3 2020. By the start of the new year, it had reached its pre-pandemic level and has since continued to grow robustly. Within that growth, searches on behalf of private equity groups are rapidly increasing.
Real Estate Private Equity Executive Hiring is on the Rise
SCI's Search Opportunity Index is an internal metric combining executive recruiting assignments for which the company is asked to submit a formal proposal and those for which the company is actually engaged.
To be clear, PE companies have always been among our clients, but there are characteristics of the recent growth in these searches that stand out. In addition to an increase in the overall number, the proportion of our searches with PE firms is well above historic norms. The number of searches with new PE clients is up. The seniority level of these searches is climbing. Consider some of the assignments we've successfully completed in the past year (or currently have underway):
- Co-Head of Portfolio Management to lead a new core+ open-ended multifamily investment fund on behalf of a privately held owner/developer/operator.
- Senior Vice President of Acquisitions to develop and execute the capital deployment strategy of a new platform focused on US industrial and warehouse distribution centers launched by an international PE investor.
- Head of Multifamily Asset Management for a newly assembled portfolio of nearly 30,000 value-add multifamily units in primary and secondary markets across the US on behalf of a multinational PE firm committed to further growth.
- Senior Vice President - East and Senior Vice President - West to form the investment strategy, scale the operating platform, and oversee acquisitions for a PE investor building a nationwide portfolio of industrial outdoor storage assets.
- General Counsel, Vice President of Asset Management, and Director of Capital Markets for the rapidly growing US multifamily investment and development platform established by an international PE investor.
What Does This Hiring Mean?
There have been numerous articles and reports recently about how PE firms are entering 2022 with record-level war chests and that a wave of PE investment is coming to shake up the commercial real estate market, but you can find some version of these analyses and predictions for each of the past five years (I mentioned above that this was the case back in 2019). Also, the same circumstances that held back this PE capital deluge in previous years – a lack of pricing capitulation from sellers and tremendous competition from other investors – are still very much in place.
There are two things that make this year potentially different. While the year-over-year increase in overall dry powder is perhaps unremarkable, a slightly deeper dive into data from Preqin reveals that the average PE real estate fund size increased an incredible 47%. That represents an enormous concentration of capital that can be deployed at scale in the acquisition of platform-level portfolios or even entire operating companies (not coincidentally, some of the strategies we’re seeing undertaken by the clients in the searches described above). There have been new announcements of these types of mega-deals practically every week.
The other thing that has changed is PE companies may now have access to another type of capital: a pool of very senior level real estate industry human capital, leaders filled with a sense of entrepreneurial restlessness amid what the executive mentioned at the start of this article called “a career midlife crisis.” In addition to the obvious expertise that these executives bring, they also carry with them credibility and established relationships, the lack of which often put PE firms – particularly newly-formed ventures – at a distinct disadvantage versus well-known real estate investors.
