Real estate money managers and consultants are all abuzz about what role real estate consultant Nori Gerardo Lietz played in Deutsche Bank AG's $490 million acquisition of RREEF, Chicago.
The deal, which had been widely expected, was announced earlier this month.
Sources who asked to remain anonymous charged that Ms. Lietz approached Deutsche Bank with the possibility of acquiring RREEF; they said that was a conflict of interests because the biggest client in her firm is the $150 billion California Public Employees' Retirement System, Sacramento, which also is RREEF's biggest client.
Ms. Lietz, managing director of the real estate practice of Pension Consulting Alliance Inc., Portland, Ore., denied the accusations. She said PCA provided Deutsche only with valuation and growth assumptions about RREEF.
Provided strategic advice
Ms. Lietz said she was hired initially by Deutsche Bank in July to assist in restructuring its European real estate portfolios. "We disclosed this to our clients, none of whom had investments in Deutsche Bank products," she said in an interview. "We provided strategic advice about the management of their (Deutsche's) portfolios in the United Kingdom, Australia and continental Europe.
When RoProperty Holding, Rotterdam, Netherlands, announced its intention to sell its wholly owned subsidiary, RREEF, "Deutsche Bank decided to pursue it," Ms. Lietz said. "Deutsche Bank used its own investment banking unit as adviser, and we provided valuations and growth assumptions to help them calculate incentive fees for the RREEF managers."
Ms. Lietz emphasized it was strictly a consulting assignment and said she was not a party to the negotiations: "We don't have that level of influence. Deutsche won because it was the highest bidder," she said.
A letter to clients, which Ms. Lietz made available to Pensions & Investments, states PCA is dropping the Deutsche assignment. "We can't advise on Deutsche Bank's core portfolios now that they've acquired RREEF, because RREEF manages PCA client assets," Ms. Lietz said in her letter.
But she also wrote: "We encouraged DB to pursue the acquisition for strategic reasons, advice they followed."
"We encouraged it because RREEF is a fine firm with a lot of analytical systems that could help Deutsche in its European operations," she said in the interview.
Industry observers said Ms. Lietz earned a hefty seven-figure fee for her work with Deutsche Bank, but she declined to disclose it, saying the amount paid and structure of the fee were part of a confidentiality agreement.
Nevertheless, some industry members said Ms. Lietz's independence has been compromised.
Said one industry expert: "CalPERS is going to have to approve the assignment of its separate account business to Deutsche Bank, and if its real estate consultant represented Deutsche Bank and got a success fee doing it, how could it not be a conflict?"
But Terry Ahern, principal at Townsend Group, Cleveland, one of PCA's main competitors, said: "I haven't gotten the details on all this, but I respect PCA as a competitor. They have always showed good judgment in the past."
And Mike McCook, CalPERS' senior investment officer for real estate, said through spokesman Brad Pacheco that he didn't believe there was a conflict because Ms. Lietz had fully disclosed to the system that she was doing work for Deutsche.
He also said he didn't think the merger would affect the portfolio initially, but that the merger would be carefully monitored. "Any time two firms merge, we always have to see how it is going to impact the team that services us," added Mr. Pacheco. RREEF manages around $4.5 billion in a joint venture with CalPERS, called CalWest, that has focused on building a portfolio of industrial properties.
Other RREEF clients were cautiously optimistic about the merger.
Ken Shaffer, chief investment officer at the $28 billion Los Angeles County Employees' Retirement Association, Pasadena, Calif., said: "We will monitor them closely and see if they are affected by the new ownership. We have been happy with their performance." RREEF manages $1 billion for the system in separate accounts.
Richard Gunthel, the new managing director and global head of DB Real Estate, the real estate investment group of Deutsche Bank, said he doesn't expect to make many changes at RREEF.
"The two businesses are so complementary, there is very little overlap in what we do. DB is mainly offshore, specializing in opportunity and high-yield products, while RREEF focuses on value and core products. RREEF didn't have high-yield or mezzanine funds, which we do, and now they can offer them to their clients, and they come with beautiful long-term track records."
The key thing about the transaction is the management team, Mr. Gunthel emphasized. "We have gone to great lengths to make sure that key people are comfortable with the remuneration. We are giving them long-term incentive programs to be sure that they are inclined to stay."
Good deal for both
The deal could be very good for both RREEF and Deutsche Bank, said Frank Blaschka, principal at Townsend Group.
"We understand that RREEF will continue to operate independently, not too differently from the way it did before. Most of our clients don't know Deutsche, which specializes in high-return and opportunity funds. They could likely market U.S. real estate to German pension funds, and RREEF might get additional capital from Deutsche Bank for co-investments, which would be good for RREEF," he said.
The acquisition gives Deutsche Bank major access to pension clients it didn't have before, said Terry Sander, chief executive officer of Westwood Consulting Group, Portland, Ore. But she cautioned: "With Deutsche Bank consolidating its various units to become a big real estate adviser, it remains to be seen if they will be able to reinvent themselves as a new advisory firm and if they will be able to implement this strategy. It also remains to be seen if RREEF will be able to stay independent.