NEW YORK -- A new senior management team has been selected to run the troubled $2.3 billion Lazard Freres Real Estate Investors funds. Sources said Lazard has hired Mike Medzigian to be chief executive officer and is about to name Robert C. Larson as chairman.
Mr. Medzigian had been managing partner at Olympus Real Estate, an affiliate of Hicks Muse Tate & Furst, Inc. Dallas, where he specialized in hotel industry investments. Mr. Larson is vice chairman of Taubman Centers, Inc., Bloomfield Hills, Mich., a REIT that owns and manages shopping malls.
The pension funds that are limited partners in the LF Strategic Realty Investors I and II are in the process of voting on whether Mr. Larson should be hired. The goal is to have the new team in place by early fall, according to sources familiar with the situation. Around two-thirds of the limited partners favored hiring Mr. Medzigian, while one-third voted against him.
Executives at Lazard said they would not comment on the new management team until the hiring process is completed.
Limited partners in the Lazard funds include General Motors Investment Management Co., which is acting as a facilitator for the other limited partners; Howard Hughes Research Institute; Virginia Retirement Systems; California State Teachers' Retirement System; Aluminum Co. of America; Allstate Life Insurance Co.; AT&T Co.; Bell Atlantic Master Trust; Chase Capital Partners; Chrysler Corp.; Public Employees' Retirement Association of Colorado; Government of Singapore Investment Corp.; IBM Corp.; Illinois Municipal Retirement Fund; Illinois State Board of Investment; New York State Common Retirement Fund; Polaroid Corp.; Utah State Retirement System; State of Wisconsin Investment Board; and the International Bank for Reconstruction and Development.
The upheaval at Lazard follows the forced departure of Arthur Solomon, who was ousted in the spring. Matthew Lustig has been acting CEO in the interim.
Sources said one of the limited partners' major concerns since Mr. Solomon's departure has been who would run the funds on a long-term basis. The new team's first order of business will be developing a strategy for the funds and maximizing shareholder value.
The funds are fully invested, but not all the commitments made by the limited partners have been called yet. A call for $350 million in capital went out to the limited partners in June and there will be a call for another $300 million in the next few months, according to sources. After the situation with the current funds is stabilized, Lazard plans to raise capital for a third real estate fund, said the sources.
Meanwhile, many of the limited partners have been engaged in marathon conference calls, staying on the phone for hours at a time debating what concessions they might wheedle out of Lazard. To help appease disgruntled investors, Lazard plans to invest as much as $10 million of its own money in the funds. The firm is also considering reducing management fees, the sources said. Instead of charging the usual 1% to 1 1/5% annual fee, Lazard is considering charging the limited partners a small management fee the first year that would gradually be increased over the life of the funds. One person familiar with the negotiations said that some limited partners "want to make Lazard hurt, but that it would not be a good idea. They need to structure an arrangement that will give Lazard an economic incentive to make it work."
One of the limited partner's major concerns has been the poor performance of LF Strategic Realty Investors II, which has posted a loss so far. LF I has done well, however.
Some partners are pleased by the progress so far and the choice of senior executives. Others are distressed that Mr. Solomon was suddenly gone, leaving the funds in turmoil. The acting managers had been re-examining every company contained in the fund's portfolio to determine if the original reasons for acquiring them were still valid. But that process, which is a lengthy one, has been halted for now, probably so that the new CEO and chairman can take it over.
To some limited partners, the new managers are terrific choices. They said that Mr. Medzigian played a role at Olympus that is similar to the one he'll play at Lazard, where he will oversee day-to-day operations, while Mr. Larson will be responsible for the big-picture and strategic planning.
But others are not thrilled with the selections. One partner observed that Mr. Medzigian's strength is the hotel industry, while Mr. Larson's experience is primarily with shopping mall properties. LF II owns only one or two hotel companies and no mall companies. This limited partner would have preferred a CEO whose background was in senior living investments, since LF II is dominated by senior living companies.