From small acorns

Last month’s hire of Goldman verteran Ralph Rosenberg as managing director and head of real estate investing for New York-based Kohlberg Kravis Roberts marked the first stage in the creation of a huge real estate business. The $61 billion buyout-turned-alternatives giant, however, is keen to stress that this creation will occur gradually over time, not overnight.

Ralph Rosenberg

PEI’s sister magazine PERE spoke with Rosenberg and KKR’s chief administration officer Todd Fisher just eight days after Rosenberg started at the firm. During the hour-long conversation, the pair repeatedly described the journey ahead for the new real estate platform, using adverbs such as “carefully” and “systematically”. Indeed, it would be risky to bet that KKR would execute on giant real estate privatisations or recapitalisations anytime soon.

As Fisher pointed out: “Hiring Ralph and announcing to the world that we are getting into real estate is not a sign that we’re going to be managing a billion or two billion dollars of real estate overnight. It’s a statement that our goal over the next five to 10 years is to create one of the great global real estate franchises.”

Even a $2 billion real estate fund would be dwarfed by the private equity programme currently run by the firm. KKR Associates 2006 Fund, a global private equity vehicle, closed on $17.6 billion. Just last month the firm revealed plans for a new North America fund of between $8 billion and $10 billion.

The start of KKR’s real estate story signals  the next chapter of the firm’s evolution – not  that it is new to real estate investing. To date, however, the majority of its acquisitions in real estate have been part of wider investments. For instance, its $6.6 billion acquisition of Toys R’ Us in 2005 through a joint venture with Vornado Realty Trust exposed the firm to 1,600 properties worldwide, as the New Jersey-based retailer is an owner-occupier. Portfolio companies like San Diego-based luxury hotelier KSL Resorts and Nashville-based healthcare operator HCA are other examples of where the same applies.

Central to Rosenberg’s appointment, however, is the belief that now is the right time to start accessing the real estate markets directly. He has been mandated to provide the best solutions for the real estate components of KKR’s $61 billion of assets under management around the globe, as well as advise and lead KKR on real estate situations across geographies, asset classes and up and down the capital structure.

“There has been lots of tumult in the real estate investment management community,” Fisher said. “We’ve seen a number of players exit the market, while others are facing significant challenges. At the same time, we’re seeing significant change in the assets themselves, particularly considering the amount of leverage coming due and the number of funds running out of time. We feel that, over the next five years, there’s going to be significant change and dislocation in the market, and that’s going to be interesting.”

KKR spent the last two years evaluating its entry into real estate, but Fisher said only in the last six months did the firm meaningfully ramp up its campaign to find a candidate to lead its efforts in the sector. In that time, KKR spoke with “quite a few” candidates from of a “small community of very talented people”, sources said, including former Morgan Stanley Real Estate Investing heads Sonny Kalsi and Jay Mantz among them. Ultimately, terms were agreed with Rosenberg, the former co-chief operating officer of Goldman Sachs’ Whitehall Street Real Estate funds series and ex-partner at hedge fund Eton Park Capital Management.

“Many people with my sort of experience might have gravitated towards doing something with more autonomy and independence,” Rosenberg said. In joining KKR, he has conceded those things, but he insisted “I’m giving those up in a positive way, not a constraining way. KKR is probably the most powerful culture of any of the cultures I have worked with in terms of how they value the synergies created across the various industry verticals.” Finishing on that point, he added, “Quite frankly, there is KKR and then there is everybody else.”

In fact, it has not taken long for KKR staff across its 14 offices worldwide to take advantage of its new real estate expert. “Ralph has been on the ground for eight days,” Fisher said. “I can count at least four of the private equity teams independently contacting him because they are working on something where they see something particularly interesting with a real estate angle.”

Rosenberg readily admits he needs to grow staff numbers to help facilitate this internal service. Initially working with two other individuals currently at KKR, the team could grow to five or six professionals in New York by the end of the year. Although Rosenberg didn’t outline specific details on how the team would grow, he noted that all of KKR’s business lines are active in London and Asia and that real estate would be no different.


The firm’s first straight real estate deals are likely to be small, although Rosenberg has many large pools of capital at his disposal, each with its own risk appetite. One such pool is $15 billion held within its asset management group, but there are plenty of others beside. Rosenberg stressed, however, that there was no immediate allocation: “I think that would be a dangerous and inappropriate approach. We are going to be disciplined and intellectually honest about how much we invest, when we invest and in what form we invest.”

This is a relief for Rosenberg, as he pointed out that pre-determined allocations have “gotten people tripped up over time.” He added: “If you look at the problems created over the last cycle, many were created because the structure of the organisation was not set up to be intellectually honest and disciplined about how they faced the market and when they should say no.”

When it does invest, KKR will be an opportunistic investor. “We aren’t in the business of buying core property or triple-A CMBS,” Rosenberg said. “[We want] anything that has a double-digit return all the way up to equity-style returns. We have flexibility across that spectrum.”

KKR currently has no debut deal to talk of, but it is expected to examine opportunities stemming from the vast deleveraging currently unfolding across global markets. The excess in commercial real estate took years to create and will take years to unfold – and KKR wants to invest as it happens. Rosenberg added: “Before you even count core real estate, you’re talking about a $1 trillion industry. There’s plenty of room for a player like us.”

No interview with KKR would be complete without asking whether there was a plan for a dedicated real estate fund. Although the firm would not comment on such plans and Rosenberg was keen not to discuss fundraising matters directly, he noted that many of KKR’s investors have allocations specifically for real assets, including real estate, and as such dedicated capital would be appropriate. “Our job is to service our clients and be a steward of their capital,” he said. “Given that, you would naturally expect that, over time, there could be distinct and dedicated capital coming out of our investor relationships targeting real estate.”