Who doesn't say they're "global" these days? With all of the recent attention on the Euro's launch and worldly events even prior to January 1, 1999, it has become classe to coin the term. But just spend some time with the folks in BT Alex. Brown's real estate investment banking department based in New York and you quickly ascertain that there's a big difference between "global" and GLOBAL.
Your first stop is at Richard (Dick) Gunthel's office. Gunthel is managing director and head of real estate investment banking & financial institutions at BT, and is the architect behind BT's successful emergence as a worldly real estate financial powerhouse. He holds the distinction of being one of the longest of termers on Wall Street, having run the real estate group at BT since 1983 (that's a lifetime on the Street). And with the pending merger between BT Alex. Brown and Germany's behemoth Deutsche Bank, a new era in real estate finance is about to dawn.
Gunthel recognized early on the need for a vertically integrated organizational structure, which is a real twist on traditional Street operations. His top three lieutenants - Jacques Brand, in a brand-new role as head of North American finance & client advisory; David Brush, who runs BT's worldwide direct investment activities from his London office; and Paul Turovsky, who heads BT's trading and positioning group, distribution effort and investment management - all have years of experience at BT and report directly to Gunthel.
"All activities that relate to real estate from direct investment, trading and positioning, securitization, client advisory work, public and private equity raising, public and private debt, acquisitions, all of that falls under one person, and that's me," says Gunthel. "That goes from gestating an idea with a client to ultimately delivering an investment product, be it debt or equity, into the capital markets."
Even during the most recent real estate debacle of the late-1980s and early-1990s, BT pulled through. "We always kept our positions down because we were always concerned about that big downturn. That was the time when we really crystallized our view that we need globality. You can't be a hostage to one market. We also needed diversification of functionality. And, we needed to be totally integrated and organized under one umbrella for the entire firm. The management of the company said, 'Go do it. Real estate is going to be your business for the firm.'"
"I looked at each of these communities or local offices. I tried to follow the template that was laid out for us here by the recovery - there is going to be an RTC organization set up, there is going to be distress in financial institutions, how can I help our financial institutional guys in France, for example, capitalize on the situation and help their counterparts rationalize their problems and so forth. We said let's just take our knowledge and experience and transfer it to these other jurisdictions around the world. When we came through the depression, we resolved to do this on a corporate basis and be more diversified."
Global Scope Melding the global reach of the firm with years of real estate experience have been key differentiators for Gunthel's group.
"When you look at the real property business, focusing on this as an industry and not a product, you find that there are lots of places where the competition begin to fall away dramatically once you leave the shores of the continental United States," says Gunthel. "So depending upon the activity that you're practicing within a given jurisdiction, you generally will find fewer and fewer of your North American competitors in those jurisdictions. In Asia, nobody is there focusing on the industry and what makes the industry tick and what makes their capital market tick, how it's changing, how we should be developing clients and how we should be developing financing ideas in it."
It is David Brush's charge to lead BT's worldwide investment strategy. "We look at ourselves as what I call relative-value investors," says Brush. "All of what we do tends to be opportunistic, value oriented. We don't invest in properties that are a pure cashflow orientation as a bond or equity alternative. We look for more venture-capital type returns. It is very opportunistic. When I say relative value, what we're really trying to look at is assets, companies where they're undervalued because they're out of favor because the market they operate in is oversold. Japan is a good example of that right now. The real estate capital in Japan right now is moving very much the other way so it's a contrarian bet against that particular market. Or it's in a market where we think we have a particular informational advantage. France is probably the best example of that, where there are companies where there is a turnaround opportunity where we can bring new management or a new strategy and capital to a company that is currently capital constrained."
Brush ticks off BT investments in the U.S., Canada, Mexico, Japan, the U.K., Belgium, Sweden, France, Spain and a just-completed first investment in Germany. "We're diversified also by the type of investment. We have junior tranches of, we've got distressed debt portfolios, we have operating company investments, and we invest directly in development projects, but that's much more of a niche type of business for us where we have clients with long-standing relationships," says Brush.
"The general philosophy we have is to use the global experience that we've had and team that with local expertise. Every market we've invested in we have a local office in, so we have on-the-ground experience that we can draw from and we teamed with local partners in that market that the people in our office had relationships with," says Brush.
Since 1992, BT has completed more than 111 different international and national investments. Total transaction value and assets is $14 billion, which puts it on a par with Morgan Stanley and Goldman Sachs as the three largest investment banks on a global-activity scale. In Asia alone, it bought more than $4 billion of paper and closed on its first auction of distressed debt in Japan with the Crown Leasingin 1997.
The bottom line - "Europe to us is the United States in 1994 or 1995 and we're in position to help it. Asia is an earlier version of the same story," says Gunthel.
"It is much more of a client-driven business because we see those (European) markets coming on strong, especially with the EMU and the consolidation of the various bourses," says Gunthel. "My view is that will be the REIT industry of 2000. And it would be a crime if we missed that because we are practitioners in every one of those markets, we own assets in every one of those markets, we have advised in every one of those markets and we have people in every one of those markets, from Madrid to Paris to London. We have investments in the Eastern Bloc countries, we have investments in every one of the major Western European countries."
Already, BT has experience in some tough markets. "Our focus is taking our knowledge of the product and our willingness to put capital to work with the ultimate goal of facilitating markets and generating client relationships," says Gunthel. "You're always going to find cultural differences. In France, before you know it, we got the people who said it was impossible, not that we're such miracle workers, but to understand that when a market restructures the legacy of the impossible disappears. The same thing is going on in Tokyo right now that is going to go on in Korea, it went on in Canada, it happened here, it's going to go on in Mexico, played itself out in Spain, Italy is about to go through their thing. We've had a kind of counter-clockwise activity globally, so we think it is an extraordinary time to be in the business."
"I think you're going to see whole new companies formed from repriced assets the same way we saw here in 1993. Real estate will be a good word again in those economies and there will be a wonderful rebirth of interest there," says Gunthel.
Direct-investing business As part and parcel of its global business, another major push for BT in recent times is its funds management business. "We generate investment vehicles out of this group for the long-dated investment community - pension funds both public and private," says Gunthel. "Here again, because of the scope of our operation, we see opportunities to invest around the world, and where they might be risk-adjusted advantaged in different markets with different kinds of product, we control the creation of those vehicles."
A key difference here is that Gunthel's crew comes at the fund business from a real estate perspective. "Whereas a normal funds management business would say 'I've got an exposure in stocks, in bonds, and maybe we ought to put a little real estate in here,' they're missing the value of knowing where opportunity lies across the world because the people that they bring into it are not steeped in the (real estate) business and don't understand where the real relative value in the product or the investment medium is," says Gunthel.
Paul Turovsky heads BT's trading and positioning group, distribution effort and investment management, and has been with the firm for over 14 years. "That's been one of our unique characteristics. We've maintained a management team together for a long period of time. As a management team, we have probably been together longer than anybody on the Street. And we're pretty proud of that," says Turovsky.
Recently Turovsky's group launched a real estate investment management business involving mezzanine investments using BT's own balance sheet and third-party funds on a discretionary basis. "We've moved our equity investment activity in the last couple of years outside of the United States and increased our U.S. focus on mezzanine investing. If you look at our track record, you can see that we've done mezzanine investing in this cycle since 1991, but we've really turned the spigot on in 1996, 1997 and 1998."
BT's desire to be in the investment management realm is really not new. "It's something we had designs on for a while," says Turovsky. "The reality is that many of the times when we would look to put together transactions we'd go to other capital sources to come in and partner with us. But the only people we could partner with were the fund managers because the ultimate investors neither had the time nor the ability to react quickly enough to make an investment alongside us. We were being disintermediated from the ultimate investor and we thought that those relationships we should develop, nurture and grow - not only from the view of investment management, but for other business opportunities as well."
As of June 30, 1998, BT made 27 mezzanine investments (since 1991) totaling $507 million of total capital invested, over half of which was made with BT's own capital.
Diversified vs. disabled To some, diversification may translate into a lack of focus, but there is something to be said for longevity and staying clear of wild market gyrations.
"We are diversified in our functionality, diversified in our geography, but we operate with those diversification goals, theories and operating modes on an integrated basis. So no one business is really going to dominate the practice here at Bankers Trust Co.," says Gunthel. "If one did, that in my mind is a prescription for danger. You will not find us being overly dominated by any one particular activity. So our presence in the CMBS league tables is not all that important to us, although we do issue securities, and we do generate mortgage debt and we do securitize it. We're not in the business of running a conduit for the sake of running a conduit because after a while all your strategy becomes is a mission for scale. Once you go after scale, then lowering your costs becomes the strategy and you lose your focus."
"Back in my history, I ran a residential mortgage conduit and I saw the pitfalls of being in that kind of business. I learned the lessons that the elusive pursuit of scale for profit and the misguided thinking it presents to strategic emphasis and so forth, the difficulty of hedging the product and how cruel the markets can be when you hit periods of volatility and how costly that can be. What I preached to everybody was 'We're not in the conduit business, we're in the client business.'"
So volume isn't always the answer. "Volume is less important to us than having a long-term broad and deep relationship with a client,"says Jacques Brand, who has been with BT since 1990. "The lists that people don't see are those lists of transactions whether they are strategic or capital-raising analyses where we recommend that the client not do something rather than do something."
Three of BT's most enduring relationships include those with Cornerstone Properties, The Rouse Co. and Host Marriott. BT has worked with Host Marriott for the last five years through 11 transactions totalling in excess of $7 billion. "We could be involved in 50 transactions that make an inordinate amount of money. But that's fleeting if the people that you've just done business with don't come back and you don't have an enduring relationship where they believe that you have added value and when they need some advice or can call somebody they can trust they are going to pick up the phone."
Deutsche Bank and beyond So where is BT headed from here? Not surprisingly, there is this little merger ahead to deal with.
"From what I understand right now, there are very few components of their (Deutsche Bank's) business that overlap with our strategy in our business model," says Gunthel. "What we have is a wonderful opportunity to take advantage of the scale of their operations. And most importantly, they do not have a global real estate business, and they are very interested in us."
"I am looking very much forward to this and think it will be a totally accretive thing to the business. For us, it's great."