The Insignia Co-Investment Group and its clients work closely toward a common goal: making big profits by investing in office properties. In its co-investment strategy, Insignia finds properties that are underperforming or aren't leased to full capacity. Insignia then teams with a client to purchase the building. If all goes well, the partners will earn a hefty profit — sometimes a return of 20% or higher — by selling or repositioning the property.
The strategy works because Insignia and each individual client bring their own expertise to the deal. Together, the two companies are able to execute the transaction more easily using their complementary strengths.
The Co-Investment Group is a division of Insignia Financial Services, which is a subsidiary of New York-based Insignia Financial Group (NYSE: IFS).
“What's important is that Insignia is prepared to put its money side-by-side with our partners so that there really is a true alignment of interests,” said Jeffrey Goldberg, head of the Co-Investment Group and executive managing director of Insignia Financial Group. “We really match the specific opportunity with the appropriate capital given the risk parameters of the opportunities and the associated risk we know our capital partners would want.”
Creating investment opportunities
“The common thread through all of this is that we are looking to provide something extra for our clients,” said Frank Garrison, president of Insignia Financial Services. He said that the Co-Investment Group focuses on creating opportunities for existing clients or forging new client relationships for the firm through the introduction of a unique investment opportunity.
“I would describe us (the Co-Investment Group) as a highly entrepreneurial group with the vast corporate resources of Insignia, which gives us the ability to do both complicated transactions or just to execute transactions quickly, because we've got both the brains and the resources combined,” Goldberg said. “We've got the flexibility of a small shop, but we've got 8,000 [Insignia Financial Group] people strong behind us.”
Founded in 1995, the Co-Investment Group features 30 employees and has acquired more than $1.7 billion in assets with clients. With East, West, Midwest and South regional acquisition offices, the Co-Investment group can effectively monitor markets across the United States. The group determines when to buy and sell in markets across the U.S. and the world.
The Co-Investment Group works with a variety of companies, from life insurance firms looking for long-term core investments, to more daring groups searching for opportunistic investments that hold the promise of 20% or higher returns on the property.
According to Kevin Kaseff, a West Coast acquisition officer, the core investments make up 25% of the group's investment activities. The remaining 75% is more risky; it involves repositioning and selling assets to make a big profit.
Against the grain
The Co-Investment Group doesn't always follow the conventional path concerning current investment wisdom. “In many ways, we are contrarian investors in addition to following general market trends,” Goldberg explained. While the Co-Investment Group has focused on central business districts for office properties, the group doesn't discount suburban office properties in markets recommended by troops from the parent company who survey the state of the markets from the ground level.
Kaseff said ground intelligence gathered by Insignia Financial Group enables the organization to pursue contrarian investments. The firm is able to watch what's happening in different markets from various regions in the country. “The majority of the markets that I follow we wouldn't touch at this point,” Kaseff said. Even so, he explained that brokers and property managers continue to scrutinize the West Coast markets closely, and Kaseff is in contact with employees so that the Co-Investment Group will be ready to pounce on that market when conditions improve.
Let's make a deal
The goal of the Co-Investment Group is to generate property deals with an asset class that makes the most sense at a given moment. Goldberg said sellers in today's market want assurance that deals will close. “They want to deal with people that aren't just talking dollars but are capable of closing quickly and at the stated prices,” he said. “We can offer a seller a higher level of confidence that the deals are going to get done, especially in a market like today where there's turmoil.”
Finding the best value is the Co-Investment Group's maxim. In typical cases, the group expects a three- to five-year hold before unloading the property. In special cases, the hold is even shorter.
A West Coast deal in 2000 is a prime example of what the Co-Investment Group tries to accomplish. In the Kifer transaction, as the deal was named for the building at 950 Kifer Road in Sunnyvale, Calif., Insignia and Blackacre Capital purchased a vacant 105,000 sq. ft. suburban office building in a value-added deal.
Based on its extensive leasing experience in Silicon Valley, the Co-Investment Group recognized that the building location was ideal, Kaseff said. “We jumped all over the opportunity, tied it up and turned it around. Within three months the building was fully leased.” Then three months later the group found a buyer, and nearly doubled the approximately $13 million investment to $25 million. Kaseff admitted that this deal, which took less than six months to complete, was an exceptional one, but explained that it had all the elements of a typical deal. The group bought the property, made modest improvements, moved in quality tenants, and then sold the property for a profit.
A client's perspective
The Co-Investment Group's strength comes from the company's continuing relationships with clients such as The Praedium Group in New York.
“Insignia is our largest strategic alliance in terms of numbers of deals and assets we've bought,” said Frank Patafio, chief financial officer of The Praedium Group. He added that the two groups have completed $250 million in acquisitions.
Both companies hold a mutual respect for each other. Praedium's capital and the Co-Investment Group's deal-sourcing expertise combine for a natural fit, according to Patafio. Another important component that keeps the relationship in good standing is that the companies understand each other's investment objectives.
“We basically like to buy assets that are broken and need to be fixed,” Patafio said. “Either the assets have a tremendous amount of deferred maintenance, or buildings are half empty and need to be recapitalized.”
The Co-Investment Group knows that Praedium wants a minimum of a 20% levered return on its investments. Core investments, which generally offer a much lower return rate than 20%, don't fit in the companies' portfolio specifications.
Each company benefits financially and professionally from the relationship. “They're very effective at deal sourcing,” Patafio explained. “We're very effective at giving quick answers. We'll look at a deal and basically say yes or no to it — the deal could be as quick as 24 hours if we have all the information we need.”
Then at the next level, both companies bring separate expertise to the dealings. According to Patafio, the Co-Investment teams at both the property management and asset management levels provide excellent service. Likewise, Praedium brings banks to the table to finance the deal.
It has to work because both parties have to bring something to the table, and it's not just capital because there really is a lot of capital out there,” Patafio said. “You really have to have two teams that complement each other.”
Clients tend to appreciate Insignia's extra level of commitment. Garrison sized up the situation succinctly, “Clients like seeing someone who has skin in the game, not just someone getting a fee every day for showing up.”