BB IB M&A to REPE Acquisition

Hi guys!!

Been lurking and now posting. Berkeley grad here at a BB anaylst and have an offer from a large REPE firm that makes investments in a range of assets (multifamily, industrials, commercial, hotel, healthcare). I went through the interview and completed the modelling exercise which was pretty straightforward. I was given a few Argus questions but not a test so that was straightforward. My question though is once in REPE do you REPE folks forget how to value normal operating companies and are you guys ever looking at traditional 3 statements for your properties, or the LLCs that own them? I'm excited about REPE, but I'm just not sure if I want to do RE forever and want to be sure if I don't like it in say 1-2 yrs, I can move to non-RE PE or into corp dev at a company? Thoughts guys?

Much appreciated!!

Zack

 

Hi Zach,

Recently started at a REPE shop and was previously at a BB. To answer your question (to the best of my nascent knowledge), it seems that looking at traditional three statement models is generally unheard of. At the property level, you'll be dealing with Cash Flow Statements that will end up flowing into your JV/Waterfall Models. At the fund level, there will be some usage of balance sheet for reporting purposes.

 

I would think you can always go back to corporate finance given your BB IBD experience. Most guys in real estate don't have that education and don't have that option.

If you really have BB IBD experience, though, you shoudl be smart enough to be figuring these things out by now. You don't want to stagnate mid-career because you keep chagning your mind before you've even made VP, right?

 
Best Response

There are exceptions but generally once you're in REPE it's pretty difficult to transition to regular corp PE. If it's only 1-2 years you won't have forgotten your modeling skills but you'd have to go in at a post IB analyst level (pre-MBA associate so skip back a couple of years) because you'd have developed an entirely different set of skills in RE and you'd have to get past them recruiting directly out of IB's. The latter can probably be overcome (I can't tell you from experience but I'd guess you could do it, although it wouldn't be super easy because PE has become so structured, especially at the big funds) and the former will only become more difficult as time passes and you get more experience. I think people on the outside of REPE and regular PE, and I'm one of the few oddballs with experience in each, think there's a lot of similarity because they both contain "private equity." Other than their structure (GP/LP, fees, etc.) they're very different and the investing skills aren't very transferable.

 

Thanks for the comments. I guess my question is when investing in properties do you eventually forget your 3-statement analysis? My understanding is in REPE you are still running the asset, say a hotel for ex, so you would want to be looking at the IS and BS to the extent you want to understand your WK needs and liquidity? Or, is this analysis usually not undertaken and you simply look at the cash flow of the asset for returns perspective?

 

I doubt you'd forget how to do a 3-statement analysis in 1-2 years of REPE but you'll miss out on the experience of diving deep into those models that you do in the first couple of years of PE, which is why I said you'd have to hit the reset button. It's not simply that the models become a little more technically complex, it's the thought that you give into the inputs, how many times you look over those inputs and commit to them and the company specific and overall industry research you'll be doing. And the due diligence you do will be very different when you're trying to close a property as opposed to buying a company. If you go into RE you won't develop those skills and would have to look at positions right out of IB if you wanted corp PE. Two years of REPE experience doesn't equal 2 years corp PE experience, it basically equals none, at least in my opinion. And it goes the other way: two years of LBO PE doesn't equal 2 years REPE.

Like cre123 said, it's primarily CF in RE. Hospitality's a different beast because it is RE and an operating company but if you get yourself into all hotel deals and do it for a while (probably more than 1-2 years) you'll get yourself pidgeonholed into hotel deals within RE because most RE guys think of that as a field in itself.

None of the above are bad-PE, REPE and hospitality are all great fields. You can build an excellent career in any of them and you're not completely locking yourself into any of them by doing 2 years but if you know you want regular PE, go for regular PE. If you want RE, go for it. There are tons of discussions on here about the specific merits of each and you can probably talk to people in each.

 

zacksc11,

I am looking to make a similar move (BB M&A > REPE)

I assume you have been on the job for a while now, would you say the transition from BB M&A to REPE is something you are happy with? Any perspective would be greatly appreciated.

Thanks

 

Actually CRE is really interesting to be honest. Yes, the underwriting is a bit different from a normal company because you the assets are RE heavy, but if you do interesting investments like hotels, ski resorts, or theme parks, or anything mixed use, you will undboutedly have to gain skills in looking both at the RE fixed assets coupled with the business operations to determine if the project is viable. Further, the strengths you gain in contracts law and negotiating terms on contracts is highly beneficial. At this fund, we do development investing, and thus we carefully negotiate terms on the Dev Mgmt Agreement, GC Contracts, leases after the property is built, insurance, etc. I have a lot of friends in traditional PE who simply don't gain these skill sets since they are not analyzing the ivnestment at the level you do in CRE. The only downside, and I know this is stupid, is the modelling. The modelling is just too simple and it kind of irritates me. All the models are cash flow models, and not traditional 3-statement modelling. I still don't understand why this is the case since some assets like hotels, ski resorts, etc you are bascially investing in an operating business and thus you need to account for Working Capital and look at the balance sheet. We get the 3 statments for the properties we own so I'm still pondering this..tho I'm sure some funds do 3-statement modelling in REPE, I would love to get others' input on the matter.

At the end of the day, I think CRE unlocks much better equity returns than traditional PE. We have a distressed fund and thus buy distressed land which we will redevelop and sell for IRRS north of 30%. I don't see this kind of equity value being created in general PE whereby you lever up a business and then simply reduce operating expenses to drive value to the equity..that's honestly not highly intelligent work in my book.

 

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