On this week’s episode of M&A Masters, we’re sitting down with Deborah Smith to talk about real estate, a first on this show!
Deborah is the Co-Founder and CEO of The CenterCap Group. The CenterCap Group, LLC, is a boutique investment bank providing strategic advisory, capital-raising, and consulting-related services to public and private corporations, owners, operators, and investment managers. They are exclusively focused on the real estate sector, with a deep understanding of what drives the industry and the relationships to back that up.
Deborah says, “We are all things real estate and we haven’t strayed from that. Our whole goal is to be in the middle… if you think about real estate and you need an advisor, you should call us.”
Listen to learn:
- Where the interest is in the real estate market right now
- Why looking at ESG in real estate long-term is now more important than ever
- Where The CenterCap Group is most dialed in and how they can help when it comes to long-term growth and valuation
- How reps and warranties insurance helps The CenterCap Group resolve differences to save deals
- How the population shake-up is creating real estate investment opportunities in 2022
Mentioned in this episode:
Patrick Stroth: Hello there, I’m Patrick Stroth, a trusted authority in executive and transactional liability, and President of Rubicon M&A Insurance Services, now a proud member of the Liberty Company Insurance Brokers Network. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders, and their investors.
Today, I’m joined by Deborah Smith, Co-Founder, and CEO of the CenterCap Group. CenterCap Group is a boutique investment bank, providing strategic advisory, capital raising, and consulting services. And what’s unique for M&A Masters is this is the first such a professional, that’s in an area that we haven’t touched on ever, and that’s real estate. And so it’s real estate on a big scale. And so I’m very happy to have Deborah here. Thanks for coming, Deborah, and welcome to the show.
Deborah Smith: Thanks so much, Patrick. It’s really wonderful to be here. Such a pleasure. Thank you.
Patrick: Yeah, well, now we’re gonna get into this real estate, which is a completely different area. But you know, it’s one of those things you can’t avoid. And you guys have a unique take because I would almost say you’re the only game in town, which is really impressive. So before we get into CenterCap Group, let’s start with you. You’re the Co-Founder of this. What led you to this point in your career?
Deborah: Thanks for the question. I’ve got a very interesting background, which I’ve realized with age is unique. I grew up on a dairy farm in Australia, not on the city lines on the beach lines either. And I did that all the way up until I went off to college. And I did a law degree, in joint economics at the University of Sydney in Australia, before moving into banking with Morgan Stanley. And I joined their Australian office as an investment banker, and then transferred to the United States in my second year. And I’ve been here ever since. I had plans to go home. And I loved my position so much and my industry at Morgan Stanley that I decided to stay. And a few banks later switched to the buy-side at CB and I came back to roost on the sell-side. And now I Co-Founded a boutique bank in the real estate space about 13 years ago.
Patrick: Wow. What’s unique about this and we’re gonna get in now with CenterCap Group, is you didn’t name it, Smith Group or anything, or anything after yourself. Where did you come up with the name?
Deborah: Well, we did try all the initials, turned out the initials, there was no good combination. And it wasn’t memorable. We just didn’t have memorable names. In fact, my name in Australia is very common. And I think every school I ever went to, there were at least two Deborah Smiths. It may be a little unique spelling, but it’s the English way. But nonetheless, it was common. So we couldn’t come up with anything that was unique from our initials. And so CenterCap, interestingly enough, in the middle of a wheel. And when we began the firm, it was on the back that we were all things real estate. And we’ve kept that true to our core throughout our history and haven’t strayed from that.
And all of our growth has been within the real estate space. But the CenterCap is in the middle. It’s also like the middle of an hourglass. But Hourglass Ventures doesn’t sound very good either. So CenterCap it is, and you know, we connect buyers and sellers, we connect users and providers of capital. And our whole goal is to be in the middle. And to be a necessary part of our industry that if you think real estate, you need an advisor, then you should call us. And that’s what we’ve held to and that’s how we’ve grown. And we now have three entities and they’re all branded CenterCap, and stay true to our name.
Patrick: Well, let’s go into this because a lot of times we want to find out about the workings of the organization, and you have it broken into three specific areas. And when we had our first talk, that was the thing that struck me when I was trying to seek the connection for our firms was that okay, well, you’re in real estate, that may not be in sync with a lot of private equity out there. But you know, what, if you’re buying companies, particularly manufacturing companies, they’re not all renting buildings, they’re buying spaces and things that you need that expertise, which is something that you know, you guys can do in a lot of ways. So let’s talk about this. Tell us, you know, in the three silos that you have, what CenterCap does do for its clients?
Deborah: Excellent question. So we do the three businesses we have, we have a corporate M&A business, which has more become more focused on buying and selling investment managers. So the investment managers are the private equity shops that own real estate and manage real estate on behalf of institutional clients. And a lot of our clients manage two to five to $10 billion of real estate assets. And so we’ve grown that business, since we started to where it is today. We also have a capital raising business, which primarily works with owners and operators on raising capital for projects. And where does that capital come from?
Usually comes from the private equity space investment managers, the providers of capital. And so we have a practice there. And it tends to follow the trends in the market as to where there is interest. And that’s one of the benefits of straddling both private equity as well as owners and operators is we know what private equity is looking for. And we know what the owner operators are looking for capital for. And so we’re able to marry that to our CenterCap hourglass. And then we have a third piece, which is consulting. And we’ve built this out, particularly as the last few years, where it has mainly focused on advising private equity, or investment managers on capital deployment.
It could also be on corporate underwriting of transactions where they do not have the expertise in house and they outsource that to us. It could be an allocations, but more importantly, the last particularly 12 months, we’ve grown a big practice in ESG consulting, which is helping investment managers, you know, be ESG ready and come up with policies and procedures, and how to think about that in the context of growth and value creation. So we’ve been focusing a lot more of our time on that business angle. And, you know, it’s it’s as the market evolves, you know, ESG, in part is about having good policies and practices within your firm. And so you know, it’s a good, to whatever firm is not looking at it should be looking at it, because I think it’s very, very important for your growth and your development going forward.
Patrick: Yeah, there’s this little segue here. But the thing about the ESG is very interesting, just because the whole concept of it was, you know, you can do well, financially by doing good, and it’s more than an altruistic feeling is one of those where, okay, you know, this is going to be our operational mantra going forward. And what the challenge is, boards of directors are being held accountable to this. And there are a lot of other forces out there that are outside of the company’s control. And so you may want to be compliant in that in that area. And it’s a lot harder to do and things change. And I can imagine, on the real estate side, you can look into that a little bit more with me is, it’s not just looking for buildings. Okay, this one’s LEED certified, we’re fine. You know, could you get into a little bit more about the ESG? Because that’s very interesting.
Deborah: Yeah, and interesting enough, over the past few years, you know, people and companies, whether it’s REITs, by the way, or investment managers, owner operators, have really understood how to tackle the E part. As people, because it’s measurable. You can measure carbon emissions, you can measure, you know, like you say, electricity and water, and these things you can measure. And so a lot more work has been done along that area. And the concepts of social impact investing, and translating that into investments has been ongoing for a few years now.
And we’ve actually worked with multiple clients on developing strategies and how to take your skills as an investor and marry it to a socially responsible investing framework. But a lot of that has focused on the E. Where the market has really moved, particularly last 12 months is focusing on S and focusing on G. And I think a lot of the conversation ends up getting sidetracked or overwhelmed by focuses on DEI. And I don’t think it has to be that narrow. I think a lot of these policies similar to the environmental string, is just focusing on thinking about what you’re investing, thinking smart about what you’re doing, and being all encompassing in that approach. And I think, you know, it comes down to your business practice as well. And I think that’s what can be embedded in the S and the G.
It’s good businesses practices, focusing more about what you’re doing with your organization, how you can be smart and disciplined, and have good policies around what you’re doing, that can translate from the E both into the S and into the G. And even like cybersecurity is becoming an increasing importance to governance, as it should be. Right as data, as we’ve leaned more and more on electronic forms of data retention. It’s and that’s become in the last 10 years where, you know, we’re a paperless office, right, so as you move more in that direction, the policy is now just catching up. And it’s being incorporated into that element as it should. And so I think it’s smart approach and even as a business perspective, if we didn’t call it ESG there are certainly many elements of it that we should all be doing as firms anyway.
Patrick: Yeah, well as as some problems are taken care of, then these new ones new challenges are and you’re just trying to stretch more. I’m curious, you know, with private equity, are you seeing more active participation with private equity in real estate? Because I always looked at it as businesses and companies and so forth. But you know, talk about that development.
Deborah: Yeah, that is absolutely the case. And we may have been a little late to the game here. But I feel particularly where compared to a year even versus two, many, many firms are focused on this many, many firms. And, you know, we’re part of various organizations, that where this has also become a committee topic, and you’re seeing public boards or forming committees or allocating these responsibilities to committees, at a board level. And on many things that the public markets lead the private markets.
And I feel like, you know, with the SEC, we’re also seeing it with our regulators that are starting to entrench and make policies around what they want to see from players that are that are fiduciaries and managing other people’s money. And whether it be a read or an investment manager, there is some responsibility there. I think, we’re a lot clearer, even in real estate that we need to have this. And we need some directive, we need policies and procedures, there’s so much information out there, around all the different elements that it’s always hard to synthesize without having an advisor on board. And it’s daunting, the task is daunting as to how you take your business and fit it within this framework. And I think where we’re our expertise is, it’s something we mirror on capital raising, corporate M&A and everything else. It’s finding what you’re good at, and finding what works for your company.
Because there’s no one size fits all. And in a world that is struggling for metrics and struggling to figure out KPIs and what’s good and what’s not. It’s to me, it’s always about taking a sensible approach for what fits for your business, and does justice to the policies and procedures and the spirit and the philosophy of what we’re trying to do. And, and it because if you set unrealistic targets or unrealistic goals, you’ll never get there, right? You have to set expectations that you can reach and feel good that you’re still contributing and delivering to what the what the philosophy is behind it.
Patrick: I can imagine, just I mean, these are very big investments, and so if you’re not real comfortable with it and have somebody who can give you a real clear picture, not only of just what you’re getting but options. You know, I can just see a lot of the private equity clients out there that we work with where they aren’t involved with real estate regularly. And they don’t know where to turn. So I think this is why it’s valuable for organizations like yours. You know, you’re committed to this sector, and you’re not dabbling in this plus other other areas.
Deborah: Yeah, good question, I think for us where we tend to get selected as a firm, and where we tend to be very helpful, is we’re not just a specific ESG consultant. And we don’t just look at it in a vacuum. All of our work, whether it’s capital, raising corporate M&A, or consulting work, is in the spirit of long term growth, and as long term value creation. And so we look at everything through that light. And for our clients tends to be really helpful, because if they’re going out on the capital raising trail, they want to make sure that they can present their ESG strategy or their policy in within that framework, and to make sure that it positions along with their other marketing collateral very positively. And so that’s where we come. So we tend to layer it into the broader framework of the firm and their broader strategic objectives and where they’re trying to go.
Patrick: As these are coming together. And more resources like yours are brought to bear, these, you know, very risky, very large deals, get done faster, cleaner, happier and all that great stuff. I wanted to point that to another area and get your opinion on is one of the things that’s helped mergers and acquisitions is the ability of the insurance industry to deliver a product called reps and warranties that effectively transfers a lot of this risk away from the parties where they’re not going against each other. But over to a third party, an insurance company that has deeper pockets, and can go ahead and respond. And the success of rep and warranty and its effectiveness in positive impacts is just accelerating as time goes on in making these deals work. But you know, don’t take my word for it. Deborah, good, bad or indifferent. What’s been your experience with rep and warranty?
Deborah: Love it. We have been recommending it for years. I remember the first time it came up. No one had heard of it. And we just happened to have some excellent friends in the insurance industry. Who who issued policies in this. And as a result, I couldn’t agree more, that it makes the ability to close an M&A transaction so much easier. It really does. The concept, and as you rightly pointed out in every deal, and particularly if your seller isn’t, you know, overly sophisticated and hasn’t done a lot of these deals, or you know, particularly if it’s in real estate, where the company you’re selling is usually the founder. And what happens is, there’s an attachment to the business.
But once you get to the transaction document, and there’s reps and warranties in there, it’s like hang on, wait a second. You know, where a buyer was looking to those reps and warranties to supplement their due diligence because they can’t know everything, and price the deal on the basis that these things are true. And then the seller looks at it and says, well hang on a second, how am I supposed to know that? I don’t know what’s gonna happen. And and so then the conversation becomes very uncomfortable between the micromanaging of what the wording is in reps and warranties and the seller’s comfort of what they the reps they have to make.
And next you see post close, then you’ve got issues of clawbacks and escrows, and then they talk about surviving periods. And what’s interesting in that conversation, the seller already has these reps. Every day that they come to work. But once it becomes an M&A trade, and it’s transferring hands, it’s like well hang on a second. And that’s where reps and warranties insurance is helpful, because it is really taking a risk of loss, financial loss, where these two parties are arguing over who should bear it, and it gets transferred to a third party. That’s what it does. And as a result, it gives the buyer comfort around their pricing. It helps on execution timing of a deal to get done.
And it gets the sellers more comfortable about the reps and warranties that they’re putting forward and can help them get through the execution process a little bit quicker. So all in and particularly if you’re surviving and there, it’s not 100%, then the seller and the buyer have to work together going forward. It’s also a positive in that respect. So we have found it very helpful in getting parties across the table and resolving differences that could be much more very material and in a different world would lead to a termination of a deal even through the fear of the unknown is very helpful.
Patrick: Yeah, a lot of times the seller is not experienced the in in the transaction. You know, they’re participating in the diligence process, and they’re cooperating as much as they can. And then all of a sudden, they see this indemnification provision, and the reps and so forth. And they’re looking at the buyers saying wait a minute, I just bared my soul. I told you everything. You can’t hold me responsible in the future for something I didn’t know about.
Patrick: Yeah. And an experienced buyers gonna look and say, yeah, but I’m betting 10s, hundreds of millions of dollars that your memory is perfect.
Deborah: And if you, how am I supposed to know? I’m the buyer. I’m getting my information from you out of the two of us. You’re the one who’s supposed to know, right? And you’re the one who’s supposed to bear the risk, and particularly when it’s a founder. And when you talking about that surviving risk, it’s to them, right? And it’s compounded if there’s two joint founders. And when we’re talking about who’s going to bear, do you bear it for each other? What happens if someone happens to one and they default? Do you bear? This just takes some of that angst out of out of the process. No question. It takes some of the angst out. And we as a firm now tend to suggest it on our deals when we move forward. And it gets to that place as an avenue that parties should explore.
Patrick: Yeah, and there are a lot of organizations that don’t think that rep and warranty applies to real estate deals. It absolutely does. And it can be a real, you know, bridge to get the two parties across the finish line.
Deborah: I couldn’t agree more. I absolutely agree with that. Been there done that. And it’s true.
Patrick: Great. Now, Deborah, what you know, we didn’t go over this, I apologize. But give me a profile on your ideal client. What are you guys looking for?
Deborah: So it depends on whether it’s buyer or seller, but I think in you know, if we’re looking, we’re working with a seller, and they are looking for a strategic investor, or they’re exploring strategic alternatives, the best clients for us are ones that can sell their own story, right? I mean, we can come in and it constantly amazes me how many super amazingly talented real estate investors are out there. But that doesn’t mean they know how to run their organization, or that they’re able to sell it as a corporate in the best light when someone comes in. They can talk about real estate all day long. But when it comes to that translation to the corporation, it doesn’t necessarily transfer 100 percent.
So those ones that, you know, we can go out with a marketing pitch. And as I say to our clients, I can position you in your best light, but it is up to you to stand behind it and for you to sell it, because we can bring parties to the table. But at the end of the day, you’re a company, and you’re the one who’s entering into this deal. So you need to be comfortable with what we’re putting out, whether it’s financial projections, whether it’s a marketing story, and same with due diligence, this is your story to tell, we’re just the conduit to help you to tell it, right. And then I think on the buy side, when we’re looking for a target, in some ways, the best thing is the diamonds in the rough. Ones that don’t, have not, are not looking for a transaction, and ones that are exceptional at running a company or their business, but they lacked something that helps them to grow.
And whether that’s geographic diversification, product diversification or distribution, those parties, why because then the buyer can help them grow. Because for a buyer to be able to add value to the target is how you create value in growth. And so those targets that I think are very helpful, where you can add something to the table is, is that’s where I think it’s super great. And when you get to participate in those kinds of transactions. And you know, we work with a lot of clients post close to see those things blossom, and for the integration to go smoothly. And for them to really get the one plus one is three, is the ultimate, you know, benefit for an advisor.
Patrick: Yeah, well, and this is a real simplistic, but you’ll also have clients come to you and say, you know, we need to grow geographically. And you know, it’s going to make more sense to buy real estate than leasing and so forth. And or buy and build, those are the areas you’re at, is there a minimum threshold value wise, or or?
Deborah: Yeah, well, for us, we have historically not worked with the super small guys. We’ve tended to work particularly for private equity shop, between, you know, it’s a minimum of like around 2 billion and up. And and that’s partly driven by we deal with institutions, you know, we’re an institutional advisor. So on the buy side, you know, it’s insurance companies or foreign buyers who want to get into the US real estate market, or it’s bigger equity shops that are looking to supplement through geography, product distribution in their business. And we do work with a lot of owners and operators of real estate, including REITs, but even those, to get the institutional interest do you have to be of a certain size. Although I will say, you know, particularly recently, you know, we as a firm have recognized that we’re very good at picking management teams, who want to be bought, or want to be sold.
And so you know, we have now looking at whether we should go down that spectrum. And instead of looking for fee compensation, whether we should look for, you know, sponsor firms through equity ownership, and help them raise capital and help them grow into something much larger. And I think for us, you know, we’ve always been so careful, at only working with clients, we truly believe we can help that the institutions that we work with now look to that, that we’re only taking them opportunities that we truly believe are good opportunities to invest in. And so as a result, it’s a little bit of maybe we should be more closely aligning with those parties, and, and invest a little more of ourselves in them, and see where we can take them. So we’ll see how that pans out.
Patrick: We’ll see as those developments go. And that’s that’s great, as we get the word out about you, and so forth. Now, I mean, is like we blinked and 2021 was done. And we’re, we’re almost, you know, to mid point as now. I mean, it feels like yesterday, with everything flying by and everything, you know, what trends do you see for the for going forward this year?
Deborah: 2022. Let’s think about that. So, so far, M&A wise 2022 is the same as 2021. And if people are talking about slowdowns, and it hasn’t come to us yet. We seem to have not got that memo. From an M&A perspective we’re super busy. We’ve got a lot of trades, we’re hoping to get close soon. A big pipeline of what’s coming down the pike. I would say for the same reasons again, is that people are still focused on growing their business and and even with all the noise going on in the markets they’re still focused on that. I think on the the the real estate side, the owner operator side.
That sector has gone through a lot of evolution, as COVID has come and COVID has impacted and whether it’s industrial or multifamily and logistics and some of these spaces are besieged there’s so much opportunity capitals looking forward, operators need capital, those spaces are very fluid. But then again, you know, office we’re trying to work it out, retails trying to work it out. And we’ve gotten deals done in retail, but they’ve been very focused in the execution of those. And then hotels is tough. So the real estate, it kind of it will always bounce around. At any point in the cycle, it always bounces around.
And obviously though the wildcard is interest rates, and the second wildcard is inflation, and how those two go at each other will have bearing on the real estate space. But in the interim, it isn’t creating uncertainty. But right now, the demand is still there. Because you know, COVID has really shaken things up. Ecommerce has shaken things up. Shifting, but you know, population patterns has shaken things up. And that’s creating opportunity. So right now, it’s which one of these things is going to prevail at the real estate side, I think the jury’s out. But we’re still certainly seeing enormous amount of opportunity for investment, even at this point.
And then as we talked about, on the consulting side, you know, ESG has become very a big piece for us. And we’re definitely seeing a lot of activity activity there. So as you can see, across the three businesses, it’s a great thing about real estate, it’s whenever there is uncertainty, real estate flourishes, and it just depends in which direction it goes. As long as it isn’t a credit crunch, which has happened in the last GFC. And there was no debt available. That changes everything. But right now, interest rates are moving, and and we’ll see we’ll see how it plays out. But right now, we’re not seeing a credit crunch, what we’re seeing in today’s market.
Patrick: Gotcha. And I mean, you know, the land is not gonna go away. So that’s one of the things that’s nice. This isn’t a resource. I mean, it’ll it’ll vary in demand, but it’s always gonna be around.
Deborah: Yeah, that’s right. People need somewhere to live, somewhere to work and somewhere to eat.
Patrick: So we have that. Deborah Smith, how can our audience members find you?
Deborah: So we are you can find us on our on our website, which is www.centercapgroup.com. We’re also on LinkedIn, you can type us in, we’ll pop right up. I’m on LinkedIn, you can type in Deborah Smith CenterCap, I should pop right up. But they’re the best avenues and on our website there’s our email addresses and our phone numbers. We’re easy to reach, easy to track down.
Patrick: Fantastic. Deborah Smith from CenterCap Group thanks so much for joining us. Absolute pleasure learning about more stuff about real estate. Thank you so much.
Deborah: Thank you. Thank you. It was an absolute pleasure to be on. Good talking to you.