DALLAS - With the purchase of Baring Advisors by the former Prentiss Properties Realty Advisors Inc., the theory that bigger is again better in the pension real estate industry is becoming a reality.
The new firm, which has 50 clients and $1.2 billion under management, will be known as Acacia Realty Advisors, and will be based in Dallas, said Gary Schwandt, managing director. Acacia - for an undisclosed sum - acquired the $395 million domestic real estate advisory business of New York-based Baring Advisors, which was a subsidiary of Barings PLC, London.
The $80 billion California Public Employees' Retirement System, Sacramento, is one of three clients Acacia gains as a result of the acquisition. Telephone calls to the pension fund were not returned.
The new entity will be majority owned by its management, according to Mr. Schwandt. Four partners, including developer Michael Prentiss, owned Prentiss Properties Realty Advisors.
Twelve Baring employees will join the new firm - three from acquisitions, four from asset management and five support staff, Mr. Schwandt said. They will be based in New York. Richard Reeves, former chief investment officer with Baring, will be on Acacia's investment committee, said Mr. Schwandt.
Acacia also plans to hire a researcher. Jacques Gordon, former director of research with Baring, left the firm in the summer to join LaSalle Advisors.
"We were hoping we were going to get him," said Mr. Schwandt, noting acquisition discussions began before Mr. Gordon's departure.
"We've doubled the number of professionals, but only added one-third to our asset base, so we have a strong people-to-asset ratio," said Mr. Schwandt.
According to Mr. Schwandt, Baring approached four to five other real estate managers to discuss the sale of its domestic advisory business.
"They came to us as a result of our affiliate Prentiss Properties Ltd., which manages a property for them," he said.
Among the suitors for Baring was Koll Investment Management of Newport Beach, Calif., confirmed Robert Feren, chief investment officer.
While Barings' motivations for seeking the sale are unknown - Richard Saunders, who oversaw the firm was unavailable - insight can be gleaned from Mr. Reeves' comments about the capabilities of the new firm.
Consolidation in the investment management business and in the real estate money management business in particular is making it difficult for smaller firms to compete, according to Mr. Reeves.
"We are seeing a lot of the pension funds wanting to do business with bigger firms that offer more services on a larger geographical scale," said Mr. Reeves. "The threshold for assets under management is increasing," said Mr. Reeves, noting one way to acquire more assets is to buy other companies.
"Clients felt more comfortable with that (size)," he said. "Now we become part of such an organization."
According to Nori Gerardo, a real estate consultant in the Portland, Ore., office of Pension Consulting Alliance, bigger is not necessarily better for the client, but it's a matter of survival for the adviser.
"The cost of doing business in real estate has increased dramatically in the last couple of years," said Ms. Gerardo. "There has been downward pressure on fees.
"Asset values have declined, so revenues have declined because most firms are paid on a percentage of assets under management," she said. "Their marginal cost of doing business has increased, and they need more assets under management to break even.
"In the mid-1980s, the general rule of thumb was you needed ($500 million) under management to be profitable," Ms. Gerardo said. "That number has doubled."
Buttressing the theory that bigger is better are the numerous mergers and acquisitions that have occurred in the pension real estate industry this year.
To name a few: O'Connor Group, New York, acquired the asset management business of Eastdil Realty Inc., a New York real estate investment bank; MacFarlane Realty Advisors, formerly of Sacramento, Calif., bought Mellon/McMahan Real Estate Advisors; and LaSalle Partners Ltd., Chicago, is in merger discussions with Alex. Brown Kleinwort Benson, Baltimore.
The new arrangement enhances Acacia's ability to grow the business because the former Barings unit brings an East Coast presence and a retail expertise, said Mr. Reeves.
The former Prentiss unit brings an expertise in industrial and distressed properties, according to Mr. Schwandt.
"Our current direction is industrial office and retail in select markets," said Mr. Schwandt. "In addition, because of our expertise on behalf of the Resolution Trust Corp. in the distressed asset business, we are going to offer our clients select opportunities to acquire distressed assets."
The decision to change the firm's name to Acacia was due to confusion in the marketplace between the investment management unit and its property management affiliate, Prentiss Properties Ltd., said Mr. Schwandt. The companies no longer share a common ownership, he said.
"They will continue to be the preferred provider of property management services but only at market rates and terms," said Mr. Schwandt.