ASIAVIEW: Awaiting direction

Why Bank of America Merrill Lynch’s decision to shelve the sale of its Asia real estate platform makes sense. PERE Magazine, February issue 2010


Whenever a regime change occurs, it is natural for those underneath the top echelons of the new leadership to stop what they are doing in anticipation of new orders to come.

So it should come as no surprise that shortly after Ken Lewis, the now departed chief executive of Bank of America, announced on 30 September that he would retire from his position, Merrill Lynch, the investment bank bought at the start of last year, was reconsidering whether to sell the lion’s share of its real estate principal investments division.

The management of the platform, which is responsible for approximately $5 billion of real estate in Asia, was placed on the market last July several months after potential suitors were sounded out about the management of Merrill Lynch’s $2.65 billion Asian Real Estate Opportunity Fund. A bidding process ensued and by December, a shortlist that included The Blackstone Group and Leon Black-led Apollo Global Management had been whittled down to just LaSalle Investment Management and ING Real Estate Investment Management.

“With sales and values improving, why offload now? If anything, holding fast now could help Sesler and his team avoid having to answer the otherwise inevitable question of why did it offload before the market returned?”


A successor to Lewis, in the form of Bank of America’s own head of consumer and small business division Brian Moynihan, was chosen and he began his tenure at the helm last month. But until he and his regime bed in and get around to deciding whether Merrill Lynch’s real estate principal investments division has a future with the bank, the team – led by Doug Sesler – are right to sit tight and see what happens.

For one, market conditions would favour a standstill. Although not a foregone conclusion, while Asian markets recover at a faster rate than Europe and North America, it would be reasonable to suggest much of the platform’s portfolio would follow suit.

The fund is spread primarily across Japan, China, South Korea and India. A glance at an Asia Pacific market report by DTZ published in December shows transactional volumes reached $67 billion last year, a 22 percent increase on 2008. The firm contrasted the increase in Asian sales to a year-on-year fall in Europe. DTZ singled out increased Chinese investment as a key factor behind 2009s regional figure. Merrill Lynch’s platform contributed to that with more than $100 million of sales in the country.

With sales and values improving, why offload now? If anything, holding fast now could help Sesler and his team avoid having to answer the otherwise inevitable question of why did it offload before the market returned? One executive close to the platform said: “When turmoil happens at the top nobody takes risk and sticks their neck out. They want to see what happens first.” The same executive recalled the same thing happened when former Merrill Lynch chief executive John Thain left the bank. “Everything was in limbo,” he said.

Under the current plan, the platform sale may be reintroduced towards the end of the second quarter this year. Whether the two shortlisted finalists, LaSalle and ING REIM, will be willing to thaw their bids alongside the now-frozen sales process remains to be seen.

It emerged in October that ING REIM is itself to be “divested” by 2014 as part of a wider strategy by parent company ING Group to exit its insurance and investment management businesses. This will surely raise questions from Merrill Lynch’s Asian LP base over the validity of its bid. While a comparable immediate future is unlikely to be in store for LaSalle, the investment management arm of Jones Lang LaSalle may have different priorities come the end of quarter two also.

“We’ll see who emerges as a viable candidate in 2010,” the source said. He acknowledged the process may have to “start from scratch”.

If you look at Bank of America Merrill Lynch’s website, you will notice that on the Global Principal Investments page BAML Capital Partners, the merged bank’s private equity and mezzanine capital investments group, has its own link for further information, as does BAML Global Strategic Capital, its strategic investment house.

At the bottom of the page sits BAML Real Estate Principal Investments. Described as managing “legacy” Merrill Lynch balance sheet financing as well as real estate private equity funds, it has no further information link. Whether this was a deliberate indication that the platform remains in the offloading bay or not, once Moynihan considers its direction, things will become clearer. Until then, Sesler and team are quite correct to be sitting tight.