The Merrill Lynch Asia Real Estate Opportunity Fund, the bank’s largest sponsored fund, with US$2.65bn invested, is in play. Private equity firms Apollo Management and Blackstone Group have held discussions with Bank of America Merrill Lynch about buying its 25% stake in the fund.
With BofA Merrill officially denying that a sale process is being implemented, the extent of the discussions with potential bidders is far from clear. One insider has described the contact that the bank has had with Apollo and Blackstone as a “conversation”, although the source declined to confirm whether it was the private equity funds or BofA Merrill that had instigated the discussions.
The bank is expected to select a final bidder by May, at which time due diligence would begin. Should that sequence of events unfold, the whole process could close by the third quarter, according to an insider close to the discussions.
In spite of all this, BofA Merrill has not yet advised the fund’s employees or the fund’s limited partners – the bank’s co-investors – that any discussions have taken place with Apollo and Blackstone.
BofA Merrill’s stake confers on the bank the status of general partner – and effectively controlling shareholder – of the fund. With a US$2.5bn second round for the fund called off in January, the bank is at least off the hook for a US$500m injection into the fund, but it also means that the fund is now in limbo.
It has a team in place but no cash to do deals, and there are no immediate plans to raise fresh capital. What does that say about the future of the fund and BofA Merrill’s commitment to its sponsored fund business? “That’s a very good question,” said one insider.
In addition, the bank’s existing investment represents a massive chunk of balance sheet that cannot be ignored in the current climate of bailouts, politicised banking and capital preservation.
Right man for the job
If BofA Merrill did decide to proceed with a sale, either of its own accord or in response to approaches from the private equity firms, the bank would be in the happy position of having at the helm Doug Sesler, previously Merrill’s co-head of global real estate and now head of global principal investment at BofA Merrill, which includes ultimate responsibility for the fund.
Sesler won industry awards in 2002 for his US$1.06bn sale of Citigroup’s world headquarters in New York to Boston Properties. His masterstroke came in 2007, when he advised Sam Zell on the sale of Equity Office to Blackstone Group for US$39bn. In doing so, he established a reputation for engineering a deal at a “Godfather price” – an offer that could not be refused.
If a sale goes ahead, the move to install Sesler will have proved fortuitous. And on the face of it, BofA Merrill looks to be in a good position to secure a sale. The bank can let funds bid for the stake, and then approach the limited partners with one or both of the offers. It could then seek consensus about the transfer of the general partner title to either Apollo or Blackstone.
The limited partners at that point would have to accept the offer presented by the bank, or independently find their own new general partner. That would extend the process by months: in the interim, the fund would be left bereft of capital and direction, and with the fund’s employees likely to jump at the first exit opportunity.
A clean, immediate buyout would be preferable for the limited partners. And, if it were to manage the process without the involvement of the limited partners, BofA Merrill would have total control and would be likely to secure a better price for its stake.
Two in the frame
Joseph Azrack, 61, is leading the bidding on behalf of Apollo. Azrack, along with Apollo’s founder, Leon Black, is building a global real estate business in preparation for an IPO. Apollo has one problem: it is missing an Asian real estate portfolio, whereas its chief competitors (Blackstone, Carlyle and KKR) all have property assets in the region.
Azrack has 40 years of industry experience and helped build Citigroup Property Investors, which has about US$13bn in assets. Azrack is expected to inject much-needed capital into the fund and to launch a fundraising programme.
Blackstone is believed to be interested primarily in the fund’s Japan assets. That theory was bolstered by the recent departure of Jinkyu Hong, formerly a co-head of Japan for the Opportunity Fund, who is widely expected to be heading to Blackstone.
Blackstone already has a team in place based out of its offices in Hong Kong and Tokyo and, as such, is not expected to need much of the legacy Merrill team. That could be one reason why Blackstone is believed to be offering a higher price than Apollo for BofA Merrill’s stake.
By Jasper Moiseiwitsch