According to Alex Jeffrey, the global chief executive of Savills Investment Management, exercising the real estate manager’s call option to buy the 75 percent of DRC Capital it did not already own was an “easy decision”.
Speaking to Real Estate Capital following the announcement of the deal, worth an initial £31.3 million (€36.3 million), Jeffrey said the debt fund manager’s performance since Savills IM acquired an initial quarter-stake in 2018 convinced it to buy the whole business. “We have got to know them well over the last three years. They have delivered everything we expected they would, and more, so there was no hesitation in exercising our option.”
Since it was founded in 2012 by former real estate bankers Dale Lattanzio, Rob Clayton and Cyrus Korat, London-based DRC has lent more than £4.8 billion – a track record Jeffrey said makes it difficult to compete with.
Jeffrey, speaking from Singapore, where he has been based since 2018, explained that the benefits of combining equity and debt in one company became apparent to him in his former role as chief executive of M&G Real Estate. “I saw, first-hand, the synergies between those two types of operation. For a debt business, having an equity team in-house with people on the ground across various European markets, helps in deal sourcing and underwriting. If it comes to it, and you have to foreclose – which you hope never happens – you have an asset management team to help you.”
Crucially, he added, there are client synergies: “Increasingly, clients are looking to access real estate at a variety of different points in the capital stack, so you often find clients who have invested with you on one side of the house will consider doing so on the other side.”
DRC has £2.9 billion of assets under management. Jeffrey sees an opportunity to scale the business. “I do think it has tremendous growth potential. Dale, his senior colleagues, and us, are very ambitious for the growth of this platform. We think it can really become one of the leading players in global debt investing.”
In addition to the £31.3 million payment this month, up to £33.7 million will potentially become payable in 2024, depending on the financial performance of the business in the three-year period to the end of 2023. According to Jeffrey, the platform’s growth will include a continuation of the high-yield/mezzanine, whole loan and senior core-plus lending strategies DRC already pursues, plus the eventual introduction of new products, and geographic expansion, potentially beyond Europe.
“It is a particularly interesting time for debt in real estate,” he added. “There has been a long-term shift in the market, dating back to the global financial crisis, and before, where you have seen the traditional bank lenders gradually pulling back across Europe, and therefore the non-bank lenders are taking more and more market share. In periods of market dislocation, that process accelerates.
“As you emerge from a crisis, you often find investors say, ‘Maybe I should put part of my real estate allocation into debt in case we need downside protection and income in an uncertain time.’ We are getting enquiries from our clients to look at the debt side, and now we will be able to offer them a full-range service.”
The platform, which will be known as DRC Savills Investment Management, will be integrated into Savills IM, although Jeffrey said it will be a gradual process. Lattanzio will continue to run the business.
“They will remain somewhat separate, at least initially, and over time, if it makes sense, there will be various functions which will work more closely in alignment together, for example support functions like finance, compliance, marketing, capital-raising, investor relations. It makes sense to pool our resources over time,” explained Jeffrey.
He added that Savills IM is keen to demonstrate to DRC’s existing clients that there will be information barriers and controls in place to protect their interests. “They lend to competitors of ours on the equity side. Those clients will want to make sure their proprietary information is respected.”
This is an achievable arrangement, Jeffrey stressed: “There are conflicts of interest in all real estate fund management businesses – it goes with the territory. As long as you are open and transparent about it with clients, and you have controls in place, it can be a win-win, because the debt team can continue to provide a dedicated service to its borrowers and, at the same time, it allows the investor clients to benefit from an enhanced service, because the business has greater resources than before.”