Having created a world-class property benchmarking service, Investment Property Databank’s two founders are selling the private company to US-listed MSCI. They talked to Alex Catalano
I want to declare an interest. I’ve known Rupert Nabarro and Ian Cullen for over three decades. Back then, UK real estate was an investment industry backwater, a very poor relation to other asset classes, not least because there was no universally accepted and reliable measure of its performance.
Nabarro and Cullen changed that. Their achievement in creating a gold standard for performance measurement and exporting it to more than 20 countries is huge. We as an industry have grown up with Investment Property Databank.
But last month, they announced that they are selling IPD. For us in the UK, it is as though the single parent who’d raised us suddenly decided to marry an unknown, wealthy American. We’re getting a new stepparent – MSCI.
We’re feeling all the classic stepchild emotions. First, happiness for IPD, which has ploughed a lonely and often difficult furrow all these years. Then, excitement and trepidation. Will this new stepparent be right for IPD – and what about us?
Nabarro, ever-candid, says: “We might be fooling ourselves and in six months’ time be thinking quite differently, but at present it seems completely the right thing to do.”
The decision, he says, evolved over the past 18 months. IPD was finding it tough to remain profitable and find enough capital to do things itself. They consulted their external directors who pretty much unanimously said there had to be a change of approach. “Then we shared it with management late last year and to our surprise, they were pretty favourably disposed to a responsible sale process.”
Lazard was appointed to find a buyer. “We said we need the right price, but also a good home where we can guarantee the future,” says Nabarro.
A conflict-free sales process
“We worked our way forward in a pretty conflict-free way, actually. There’s been amazingly little comeback, far less than I thought there would be. I think people see it as a natural development.”
Cullen gives two reasons for selling. “First, to elevate real estate investment measure-ment to parity with other asset classes. A typical comment about IPD is: ‘Yes, they do a nice little property measurement service, don’t they?’ However complimentary they are, IPD remained a property measurement service. I don’t think we’d ever shifted that.
“Second, it started as a family business and still had aspects of a family business about it; an intrinsic conservatism. I’m far more responsible for that than Rupert is. So we didn’t take out debt; we financed investment out of revenue. In the current circumstances, that model could slow us down in terms of development.”
Nabarro adds: “I’m not quite sure why we feel we’ve run out of steam, except for the obvious question of age. We’ve successfully got a large number of projects going in many countries and market areas. But we’d not realised just how difficult and expensive this is to run on a global scale.
“North America has been incredibly difficult. We went in on too small a scale to start off with; we were reluctant to bet the farm on one possibility. Some years later we have a good effort going in the US and we’ve laid some genuinely good groundwork.”
Cullen adds: “Japan is an interesting case. It has always been slow and our holding company board supported our initiative there as a holding operation. There was no way they would buy into the idea of doubling or tripling our staff in Tokyo, whereas MSCI already has a very strong presence in Tokyo and links into all the relevant clients.”
IPD’s ownership structure – a mixture of founders, staff and UK property investors also posed problems, Cullen says. “The governance model worked absolutely fine in the UK. They had equity in the business, were clients of the business, there were consultative, steering and advisory groups. It was all very cosy, little-England.”
Moving to “grown-up” governance
It was also difficult to explain outside the UK. “The independence of the business, its probity and transparency, are far better defended through a major corporate listing on an exchange. I’m not surprised that a lot of even European clients have been positive about the issue, because it means a grown- up governance structure,” says Cullen.
IPD’s close relationships with its clients and others had drawbacks, says Nabarro: “When we were talking to external share-holders the finance director of one investor said: ‘The deal seems good and MSCI seems to be good, but Ian, you will continue to do our quarterly presentations, won’t you?’
“That was kind of the problem we faced. There were so many personal connections that we either hadn’t wanted, or hadn’t the gumption, to go and get a proper account management system done by professional people who were rather younger. I think this has rather gummed up the works.
“We were so involved in delivering the system all the time that we hadn’t had the imagination to do the planning that would have taken it up to a larger scale. We haven’t imposed a sufficiently good central system on it so that there are really high, identical standards and identical products every-where – and a real growth strategy.
“The project has a tremendous amount of legs – it will go far further under somebody else’s ownership than ours. You can easily see it trebling in size in a 10-year period. I don’t think that we – and that includes the younger management – would be able to achieve that ourselves.”
Cullen adds: “We are of an age where guiding that ourselves over the next five years would be very, very hard and probably something we’d make a mess of, frankly. MSCI has so much to offer and it is not just capital, which indeed they do have and can apply. Their know-how in so many of the analysis areas that we’re in will help us accelerate that growth.”
MSCI adds property nous to its investment know-how
“When IPD opted for a formal sale process we wanted to make sure we were at the front of the queue and secure the acquisition. We’re fortunate we did so,” says MSCI chief operating officer David Brierwood.
Headquartered in New York, $3.2bn listed business MSCI provides indices, performance benchmarking, risk analysis and governance tools to big investors globally, ranging from giant asset managers such as Blackrock to boutique hedge funds.
It is paying $125m (£78m) for IPD in cash, 2.6 times IPD’s £29.7m earnings last year (its revenues were £16.7m in the six months to the end of June). This will be shared among IPD founders Ian Cullen and Rupert Nabarro, who will receive £26m from the sale, staff, and its institutional and property company outside shareholders.
“We’ve worked with IPD on a number of research projects; we use their data in our models and recognise they are a leader in what they do,” says Brierwood. “If we want to incorporate real estate into our offerings, IPD is the logical place, as it is the best.”
The sale adds MSCI’s capital, contacts, and technical know-how in equities, fixed- income and derivatives to IPD’s real estate expertise. “We spend a lot of time with big institutions that want to see their entire portfolio on the same basis,” says Brierwood. “They want a global real estate perspective. Many aspects of the market are becoming securitised and vehicles are drawing on techniques and analytics used elsewhere.”
Peter Hobbs, IPD’s business development director, adds: “We need their help to realise those opportunities. We’re in 32 markets, but not deeply in many. There are a lot of opportunities: debt market growth, the increasing importance of risk, new sectors.”
Investors are putting serious money into private asset classes such as hedge funds, infrastructure, private equity – and property. “We know most real estate chief investment officers, but MSCI gives us the opportunity to talk to asset allocators,” says Hobbs. “It’s very similar to IPD in philosophy and culture. It’s a benchmarking service with analytics as well. The fit feels very good.”
MSCI’s deep US roots will help IPD, which has found it tough to gain traction there and in Asia. “We benchmark 90% of international equity portfolios in the US, so have dialogue with major pension funds’ asset allocators all the time, and this is a conversation to include with them,” says Brierwood. “We also have a substantial presence in Japan.”
Brierwood thinks MSCI can contribute by investing and integrating IPD’s data and tools with MSCI’s, and producing more timely, easier-to-access reports. “You can look at real estate through the same lens that you look at other investments.”
Says Hobbs: “One consequences of our bootstrapping approach is that we haven’t been able to invest in technology to make it as useful to our clients as they’d want.”
The sale won’t be completed until the end of the year, but MSCI is treading lightly so as not to frighten IPD’s staff and clients. “Laurent Ternisien will remain IPD’s MD, reporting to Baer Pettit, head of MSCI’s index business, to keep IPD intact. But we’re looking to bring in additional resources from MSCI to areas we think can be strengthened,” says Brierwood.
“People are concerned about a big global company coming in. But MSCI has a history of being very consultative with businesses that depend on confidential information. We make sure clients are comfortable with the directions we take and what we do with data.
“MSCI’s expertise isn’t in real estate; that’s why we bought IPD and will rely on people like Peter, Ian and Rupert, who have been around this market.”