Buchanan Street Partners’ sale late last month to Los Angeles-based TCW Group Inc. stands to bring the Newport Beach-based company into the billion-dollar club of real estate investing.
The company expects its next investment fund to come in at about $1 billion,double its largest one now,thanks to the added drawing power of TCW, an investment manager that counts $160 billion in assets under management.
TCW, part of France’s Soci & #233;t & #233; G & #233;n & #233;rale, “is plugged into the world of institutional sales,” said Robert Brunswick, Buchanan Street’s chief executive and cofounder. “We’re going to take advantage of that.”
Buchanan Street sold a 51% stake to TCW on Oct. 26. Financial terms weren’t disclosed.
The real estate investment bank is expected to continue running as it has from Newport Beach, according to Brunswick.
The move allows Buchanan Street’s founders to cash out some of their stakes and lets the company pay off some debt it incurred growing the business, he said.
With TCW handling more of the fundraising for deals, it’ll free up Buchanan executives to focus on real estate investing.
“Key people here were spending half their time in sales mode, rather than on the investment side,and that’s our expertise,” Brunswick said.
Buchanan Street invests in offices, industrial buildings, storage spaces, shopping centers and other real estate. It has $2.5 billion in real estate under management. The company also lines up financing for developers. It will do nearly $4 billion in deals in 2007.
TCW handles investing for corporate and public pension plans, financial institutions, endowments and foundations, as well as foreign investors. It runs its own mutual funds and also invests in stocks, bonds and other investments.
Buchanan is looking to grow as part of TCW. Plans call for it to expand its Atlanta and Chicago offices, according to Brunswick. A New York office could come by the end of next year, he said.
Brunswick and executives Tim Ballard, Tim Hawthorne and Chris MacDonald started the company in 1999. They named their firm after the San Francisco street where they met while working for Pacific Union Realty Finance. They’ve since grown to about 80 employees.
Buchanan could grow to as many as 120 people in the near term, Brunswick said. But the first priority is to grow the investing side of the business, he said.
The company’s executive team is set to stay.
“We’re still a very young, driven group of senior managers who want to grow something special,” Brunswick said. “I absolutely believe that TCW is making a heck of a buy.”
The deal could afford the Buchanan partners a chance to work on deals beyond real estate for TCW.
For developers who go through Buchanan to line up loans and investments for their projects, being part of TCW stands to bring more funding from other parts of the county, Brunswick said.
The company plans to triple the size of assets under management in the next five years, he said.
At first glance, the deal seemed an unlikely choice for Buchanan and TCW.
In an interview last year, Brunswick said the company’s partners had been approached by a number of prospective buyers. Others had asked about taking Buchanan public.
At the time, management and employees preferred staying private, he said.
Near the end of 2006 the company started reconsidering.
“In order for us to take the next step, we needed to think about a strategic alliance,” Brunswick said. “We needed to find a partner, of some sort, to more effectively raise capital.”
A number of investment banks were interviewed as advisers on a deal. Most suggested a buyout by a private equity firm. That didn’t sit well with Buchanan’s partners.
“That’s short-term money, solely yield-driven,” Brunswick said.
They opted instead to work with advisory bank Grail Partners LLC of Boston, which focused more on prospective deals with insurance companies, money management firms and foreign and domestic banks.
At the same time, TCW was looking to get into real estate deals, said Robert Beyer, the company’s chief executive.
“We were looking at adding a couple strong individuals (internally),” Beyer said. “But when we met Robert and Tim (Ballard), we changed our minds about what we wanted to do.”
Keeping the Culture
Buchanan’s level of business is closer to what TCW initially thought its own real estate unit might grow to in about five or more years, according to Beyer.
All of TCW’s portfolio groups are run on their own with little day-to-day oversight. That’s set to continue with Buchanan, according to Brunswick.
“It was important that we could maintain out autonomy, our culture and our discretion that we need in our business on all fronts. We’re able to do that here,” he said.
The entrepreneurial history of TCW’s executive team appealed to Buchanan. The company, previously known as Trust Company of the West, was founded in 1971 by Robert Day,most recently in the news for his $200 million gift to Claremont McKenna College.
“Our firm grew up very fast,” Beyer said. “What started out as an entrepreneur-driven company became more of a corporation.”
TCW employs about 600 people.
Buchanan “reminds us of what we used to be like,” Beyer said. “They have an enthusiasm and spirit that’s refreshing.”
Buchanan has its own flair. The company’s annual fundraiser Real Estate Challenge for Children is part camaraderie, part boot camp.
Brunswick and a team of employees last year swam 12 miles across Lake Tahoe in 55-degree water. The partners once required workers to take part in a 150-mile relay race.
Are the self-described “investment wonks” at TCW up for those types of efforts?
“There are a few people at TCW who could use a cold-water plunge,” Beyer joked.
Beyer called ramping up TCW’s real estate investing “an obvious need” for the company and its investors. In a bit of investment speak, he called commercial real estate “an ongoing, low-volatility, high-return asset class.”
Beyer said he isn’t fazed about getting in at a time when some predict the commercial real estate market has peaked.
“All markets have their ups and downs,” he said. “Hard assets, like real estate, are generally long-term investments. For long-term portfolios, (real estate) will play a role in dampening the volatility of these portfolios.”
Buchanan plans to continue investing in Orange County. Late October saw Buchanan and the Newport Beach office of Voit Development Co. buy a 428,000-square-foot warehouse and data center building in Irvine near John Wayne Airport.
Buchanan invested $14 million in the $57 million deal. Voit plans to fix up and lease the building.
“That’s the best example of our bread and butter (deals), where we provide equity,” Brunswick said.
