Act II

ING real estate deals with Lightyear, CBRE have investors wondering

Lightyear is helping ING Clarion Partners management buy out ING's ownership

Updated with correction.

Now that the drama over when and to whom ING Group NV would sell its global real estate business is over, investors are waiting to see what happens in the next act.

In two highly anticipated transactions, the Amsterdam-based global bank and insurance company announced last week it is selling ING Clarion Partners, its U.S. direct real estate unit, to management and New York-based private equity firm Lightyear Capital LLC, while also selling three real estate subsidiaries to CB Richard Ellis Inc.

CBRE is buying Clarion Real Estate Securities, ING's U.S.-based listed real estate securities subsidiary, as well as its European and Asian direct real estate businesses. ING is also selling to CB Richard Ellis a portion of its co-investment in the real estate funds.

The deals are expected to close sometime early in the second half.

So far, investor reaction has been somewhat mixed.

Executives at the Oregon Investment Council, Tigard, which has a $500 million separate account with ING Clarion Partners and $100 million in ING Clarion's Lion Mexico fund, are keeping a close eye on the firm, spokesman James Sinks said in an interview. The investment council oversees assets managed by the state treasury, including the $56.7 billion Oregon Public Employees Retirement Fund. Salem. (Oregon also has $100 million committed to CB Richard Ellis Strategic Partners US. Value Fund 5.)

“We are always interested in organizational change. It is often more of a reason to re-evaluate a firm than is poor performance,” Mr. Sinks said.

William R. Atwood, executive director of the $10.3 billion Illinois State Board of Investment, Chicago, said: “For me, personally, I'm more comfortable with ING Clarion as a standalone than a division of a Dutch bank. I'm comfortable with them (Clarion Partners executives) under the status quo in the current situation.”

The Illinois board has a $500 million core real estate allocation to ING Clarion Partners. The board's other core manager is CB Richard Ellis, Mr. Atwood said, so an early rumor that CBRE might buy ING Clarion, leaving the board with a single core manager, “was disconcerting.”

Stephen J. Furnary, chairman and CEO of New York-based ING Clarion Partners, is pleased with the Lightyear deal.

“We don't have the distraction of being part of a larger organization. There are no integration issues,” Mr. Furnary said. “It's not only a relief, but (also) it is exciting.”

“We've moved from profit sharing to direct equity ownership,” Mr. Furnary said. He added that 10% of firm members will have ownership stakes in the firm, which has $22 billion under management.

The firm will take on its old name — Clarion Partners — and will emerge slimmer, looking a bit more like it did before Mr. Furnary and his partners sold it to ING in 1998. He said Clarion Partners will return to its roots and invest only in the Americas: U.S., Canada, Mexico and Brazil. Within two years, Clarion Partners will begin investing in other South American countries, he said.

Soon Clarion Partners will move to expand its investor base from its current defined benefit focus. Firm executives are launching a direct real estate investment trust vehicle designed to be part of asset-allocation or target-date funds in defined contribution plans, Mr. Furnary said. The vehicle will invest a small amount of assets in publicly traded real estate securities for daily liquidity. The firm also plans to launch a private real estate investment trust for individual investors.

Clarion Partners will not sever all ties with ING, which will distribute and market Clarion Partners' DC and retail vehicles. It also will continue to retain most of its co-investment in the Clarion funds.

"More focused'

Oregon's Mr. Sinks said investment council executives are assessing Clarion Partners' new ownership structure. “It actually may make management more focused and could be a plus rather than a minus,” he stated in a follow-up e-mail.

And Lightyear Capital executives say they are content to let current management run the firm. This is Lightyear Capital's first ownership of an investment management business, said Don Marron, Lightyear's CEO and chairman. Neither Mr. Marron nor Mr. Furnary would give the sizes of their respective shares in Clarion Partners.

That might not be the case for Philadelphia-based Clarion Real Estate Securities and ING's European and Asian direct real estate teams.

Sources say those units were pretty much left alone by ING's management team and might chafe under the new CB Richard Ellis management, known to be a more hands-on organization.

However, in a statement released Feb. 15, a day after the sales were announced, T. Ritson Ferguson, chief investment officer of ING Clarion Real Estate Securities, stressed the “strong strategic fit” and “highly complementary” business practices of the two firms. The firm has $19.4 billion under management.

Pam Barnett, CB Richard Ellis spokeswoman in Los Angeles, said that after the merger “the combined enterprise will continue to be independently operated.”

Executives at the $10.3 billion School Employees Retirement System of Ohio, an ING Clarion Real Estate Securities investor, are waiting to see how the merger plays out.

“We will continue to monitor our investment with ING Clarion Real Estate Securities as the parties involved move toward a closing later in 2011,” said Timothy Barbour, spokesman for the Columbus-based fund, which has a $100 million commitment with the firm.

Officials at the $37 billion Los Angeles County Employees' Retirement Association, Pasadena, Calif., do not yet know whether the changes in ownership will affect any investments.

“We will monitor the change and assess future investments on a case-by-case basis,” said John McClelland, principal investment officer, real estate, in an e-mailed response to questions.

LACERA currently invests in two ING Real Estate Investment Management Asia funds, for total commitments for $40 million, and two CB Richard Ellis funds — CBRE UK Fund III and CBRE Europe Fund III — at a combined $75 million. The association has not invested in any ING Clarion funds.

“If the ING Asia management team remains intact, the change should have little impact. We will be reviewing any rights we have as LPs (limited partners) to consent to a transfer of the GP (general partnership) from ING to CBRE,” he stated.

Still, Mr. McClelland does not anticipate difficulties with the merger with CB Richard Ellis.

“We have been pleased to date with ING's management of the former New City investment fund,” he stated. “We have no reason to believe that they will not be able to merge effectively with CBRE.” ( ING took over general partnership of the Tokyo-based real estate investment funds from former parent, New City Corp., in 2009.)

Retaining ties

Once the deal is closed, Mr. Ritson will join the global executive committee of CBRE's investment subsidiary, CBRE Investors, and lead the combined real estate securities business. Pieter Hendrikse, CEO of ING Real Estate Investment Management Europe, and Richard Price, CEO of ING Real Estate Investment Management Asia, will continue in their respective roles for the combined firm. Matt Khourie, CEO of CBRE Investors, will continue to be the global leader and head the Americas business, while Managing Director Jeremy Plummer will continue to lead the global multimanager/funds-of-funds business.

CB Richard Ellis is retaining some ties with ING as well. While CB Richard Ellis is buying a portion of the ING bank's stakes in the real estate funds, ING will hold onto the majority of the co-investments, Mr. Khourie said in an interview.

(The bank plans to monetize its stakes in the funds in Europe, Asia, the U.S. and Australia, ING spokeswoman Victorina de Boer said in an e-mailed response to questions.)

ING Insurance is also continuing its asset management mandate with CB Richard Ellis as the new manager of the funds. As of Sept. 30, ING Insurance had €4.3 billion ($5.8 billion) including its equity stakes. The bank now has €2.5 billion, which will be reduced by $100 million once the transactions close, Ms. de Boer said.

The ING businesses will round out CB Richard Ellis' global real estate investment business, Mr. Khourie said. All three are much larger than CBRE's similar units. ING Real Estate Investment Management Europe has $40 billion in assets under management compared with about $12 billion in CBRE's European business. ING Real Estate Investment Management Asia has $4 billion in assets compared with CBRE's $400 million. What's more, ING's European business is focused on core and core-plus investments while CBRE's European concern invests in value-added and opportunistic real estate. ING's Asian business invests in more countries — including Korea, Malaysia and Taiwan — in which CBRE is not invested, Mr. Khourie said.

CB Richard Ellis' securities business is a “very boutique” real estate subsidiary with $2.5 billion in assets under management compared with ING Clarion Real Estate Securities which has roughly $19 billion. “Their business is much larger with a lot of critical mass,” Mr. Khourie said. “It helps us create a market-leading securities business.”