NEW YORK — Consultants and real estate advisers used to joke that RREEF was the real estate investment manager that couldn’t be fired. But massive departures of top executives, combined with faltering returns, have ended the New York-based firm’s untouchable status.
When the firm lost 12 of its key executives between April and July, officials at RREEF, the alternatives investment subsidiary of parent company Deutsche Bank AG, Frankfurt, said the departures were expected. Industry insiders, however, said they were shocked by how many people left.
Adding to the firm’s new vulnerability, returns of the firm’s flagship core funds have been lagging.
Now, pension fund investors are reacting. They are putting RREEF on either official or unofficial watch, and are shying away from making new allocations to RREEF; some have partially redeemed unallocated commitments.
The $2.2 billion San Joaquin County Employees’ Retirement Association, Stockton, Calif., has redeemed all of its $7.5 million in unfunded commitments to one of RREEF’s flagship domestic core real estate investment trusts, RREEF America REIT II. Association officials decided to retain the system’s $25 million commitment to RREEF America REIT III.
When they bought RREEF in 2002, Deutsche Bank executives put in place a five-year leadership plan that included a healthy payout for top RREEF executives, so insiders were expecting a few top managers to take their money and run in 2007.
But they weren’t necessarily expecting midlevel managers to leave as well.
Out the door
Among those in the real estate group who left this year: Steve Steppe, chairman of RREEF North America LLC; Sol Raso, partner and managing director-global client relations; Doug Sturiale, portfolio manager for RREEF America III; Mark Carlson, Dwight Merriman and Dan Weaver, managing directors and members of RREEF’s acquisitions team; Jay Jehle, managing director and portfolio manager; and Susan Swanezy, a partner and managing director.
Most of those who left went to other real estate firms. For example, Messrs. Steppe and Carlson joined Stockbridge Capital Partners LLC, a real estate investment firm that is raising its third fund.
“They lost people they had not anticipated losing It went deeper and broader than anticipated,” said Micolyn M. Yalonis, principal at consultant The Townsend Group, Cleveland. “They have a wealth of good performance (outside of its flagship funds) and a deep bench, but going forward, the firm will be different.”
RREEF officials declined to reveal how many midlevel managers left during the period.
As a result, consultants such as Townsend are recommending that clients wait and see what happens.
“For most of our clients, we’ve recommended a watch-and-see approach — no new allocations to RREEF, and a hold on outstanding commitments. In some cases, we have redeemed or rescinded unfunded commitments, but it’s on a client-specific basis where it has been appropriate for their programs,” Ms. Yalonis said. She declined to identify the clients.
“We understand being put on watch lists given the changes, but we believe that we will … continue to earn the trust of our clients, “ said Chuck Leitner, global head of RREEF Alternative Investments. (RREEF Alternative Investments is Deutsche Bank’s alternative investment umbrella organization that has real estate, infrastructure, private equity and hedge funds divisions. RREEF North America, which is part of the real estate division, runs the RREEF America group of funds.)
Walking away
Some investors that committed capital to funds before the personnel changes have pulled those commitments, he said. “They made the commitments based on certain people, and those people have left,” Mr. Leitner said. “A lot of that we understand. It’s part of a healthy dialogue.”
One fund, the $12.5 billion Illinois State Board of Investments, Chicago, put RREEF on its watch list in July, said William R. Atwood, executive director. RREEF executives have been brought in to explain to board members the impact of the management changes on the firm’s investment strategies. Fund officials have also asked its consultant, Townsend, to monitor the situation.
“The other open question for us is their (investment) platform. We invested in RREEF. We want it to be as RREEF-like as possible,” Mr. Atwood said. “Our experience is when independent firms are acquired by banks, they end up losing their edge, and we hope that is not the case with RREEF.”
San Diego City Employees’ Retirement System this summer placed RREEF on its watch list because of the executive departures. The system has two separate accounts with RREEF: a $196 million core portfolio and a $130 million REIT portfolio, said Doug McCalla, chief investment officer of the $5 billion system.
“With departures, one of the biggest questions is how will it impact the acquisitions team,” Mr. McCalla said.
Ohio Police & Fire Pension Fund, Columbus, has $50 million committed to one of RREEF’s core funds RREEF America REIT II. Because of the REIT fund’s performance, Ohio officials downgraded it from the best internal rating of P1 to P2 on a four-point scale, said David Graham, spokesman for the $12.4 billion fund. Fund officials take the rating into account when deciding on future investments, he said.
“America REIT II is on track and continues to be on track for solid performance,” Mr. Leitner said. “America REIT II, like a lot of core funds, is at that point in the cycle where returns have started to moderate.”
Also watching
Other investors that have told Pensions & Investments they are monitoring RREEF include:
cthe $171 billion California State Teachers’ Retirement System, Sacramento, where officials have “stepped up communication” with RREEF, said Sherry Reser, spokeswoman. RREEF manages $738 million in three global funds for CalSTRS and $50 million in a mezzanine fund.
cthe $50 billion Massachusetts Pension Reserves Investment Management Board, Boston, where executives are in constant communication with RREEF concerning the executive transition, said Michael Travaglini, executive director. RREEF manages $1 billion in a core separate account and $300 million in a REIT portfolio for MassPRIM.
cthe $94 billion New York State Teachers Retirement System, Albany. John Cardillo, spokesman for New York Teachers said they are aware and monitoring the situation. RREEF manages $342 million in a domestic core portfolio and $110 million in an international portfolio for the teachers’ fund.
But it isn’t easy for investors to leave.
“Some limited partners can’t just take their money out,” Mr. Atwood said. Much of the capital is committed for periods of up to 10 years, and quick sales out of the more liquid funds could cause losses to the pension funds.
“I think the cure would be worse than the disease,” he added.
