On January 14th, 17 Kellogg Students had the opportunity to discuss the current state of the real estate markets with Perry Pinto, one of the first employees at Walton Street Capital. Walton Street is a private equity real estate firm, founded in 1994. Perry is currently a Principal in the Acquisitions group of Walton Street Capital and focuses on investments in the US. He also oversees all industrial acquisitions for the firm.
Speaking of opportunities in the current market, Perry stressed that banks will eventually start making loans and large companies that are strapped for cash will eventually be forced to sell. He was quick to add that we are witnessing unprecedented times and the rules of real estate investing are being re-written. For example, a $200 million dollar deal, considered a small deal till a year back is now being considered as a ‘large’ deal in the market. It is also likely, that in the short term, banks and private equity funds will not lend against developments but will lend only against ready properties.
Alluding to something that is on everyone’s mind, the recovery of the market, Perry mentioned that the he expects the real estate sector to rebound by the end of 2009, or by early 2010. This will be around the time that the huge sums of money that have been pumped into the system by the government will start taking effect. However, there are certain issues that may crop up in the future, one of them being the $400 Billion of CMBS debt that is expected to come due in 2011-2012. It will be interesting to see whether firms will be able to roll over this debt or will struggle to do so.
As far as Walton Street’s strategy is concerned, Perry stated that the fund is well positioned to take advantage of the current market. He also pointed out that Walton Street did not lever up its funds as much as some of the other private equity players. For Funds I to IV, the average leverage has been around 65%. Thus, their strategy and structure will not change much in these times. In terms of international expansion, Walton Street is focused on Mexico and India. The firm is currently debating the feasibility of starting a dedicated India fund.
In terms of advice, Perry mentioned that most real estate practitioners go through three real estate boom-bust cycles in their work life. In the first cycle it is difficult for you to gauge what is happening as you are new to the business. In the second cycle you know what is happening and see the opportunities but don’t have the resources to take advantage of them. However, in the third cycle you should not only identify the opportunities but should also have the resources to take advantage of them. Hopefully, all of us would have the opportunity to be a part of the third cycle. He also mentioned that students looking at entering real estate should focus on the Asset Management side of the business, since that is where value is currently being created. In today’s world, people are spending 90% of their time on managing their portfolio and 10% of their time on acquisitions.