Life after Lehmans: joint ventures can work
Just a few short years ago,
real estate joint ventures in high-growth markets looked like the
holy grail for getting access to market and high returns, fast.
Speed to market was everything - all too often, at the expense of
due diligence...Then Lehman Brothers collapsed and turned the
financial world on its head. The impact on the JV partnerships
meant disagreements about contributing equity against a now flawed
business plan. This meant the international funds were not able to
deliver the high capital returns anticipated. According to our
research, 75% of the real estate investor JV partnerships in the
pre-Lehman investor days, did not deliver the promised returns -
and it’s a similar story for other asset classes.
Despite that, JVs will remain critical for different reasons. They
are a key route to sourcing assets for investors and for developing
new market growth for enterprises (just ask the international real
estate funds sourcing deals in China!). Despite the evidence of
their previous failings, we believe JVs can still deliver the
necessary returns. This is by focusing on the assets during
critical steps at every phase of the process.
The three phases
You can split the process up into three distinct phases: asset
planning, asset development and asset
management. In each phase, the chances of success go up if the
partners can agree on a number of key steps. In fact, our research
suggests that almost half of JVs that fail, do so because one of
these stages is overlooked.
Phase one: asset planning
Phase one is about laying the right foundations; from picking
the right partner, market and asset class, to agreeing on a
business plan, deciding on accepted levels of risk and ultimately -
signing on the dotted line. These are some of the most important
activities, particularly when it comes to analysing the sensitivity
of your revenue streams and management strategies. Our advice is
that this ought to be done by someone, without a financial or
emotional investment in the venture. The risk is that overly long
deliberations may see you missing out on the most exceptional
returns. Today, taking any more than 6 months to get your
partnership off the ground is too long.
Phase two: asset development
The second phase is all about making sure that your assets are
delivered in line with your business plan and risk levels, a
process that involves setting procurement strategies and
milestones, to the agreement of project control and sales plans.
It’s also about making sure both partners’ needs are being met, and
resolving any potential conflicts or stumbling blocks.
Phase three: asset management
As the returns start to come in, you’ll need to agree on either
an exit or hold strategy to make sure you get the most value from
your partnership. Both partners will need to agree on criteria to
know the right time to move on from the outset.
Putting theory into practice
One of our investment bank clients recently acquired a developer
in an emerging Central Eastern European (CEE) market. Their goal
was to transform it from a politically well-connected but immature
local player to a ‘best in class’ regional developer in 18 months.
We started by determining the ideal outcome and working our way
backwards through each stage. We looked at the best performing
developers in the CEE market - their team, structure and
performance. Then we used those benchmarks to work out the fine
details of the JV agreement. After the agreement was signed, we
worked with the bank’s new partner to train up their staff and
bring them up to ‘best in class’ standards. Today, the developer is
renowned for being the best in the region. And the investment bank
is reporting IRR returns of more than 20%, all of which is real
proof that although there is still life after Lehmans for JVs,
their success rests on diligence at every step.
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