Real Estate Forum Podcast EP07 Ron Dickerman on Liquidity, Capital Flows & the Future of Real Estate

Key Concepts

• Secondary Market Transactions: The buying and selling of existing investment interests, rather than newly issued ones.
• Liquidity Providers: Firms that facilitate the conversion of illiquid assets into cash for investors.
• Limited Partnership (LP) Interests: Ownership stakes in a partnership, often used in real estate investments.
• General Partner (GP): The managing partner of a limited partnership, responsible for operations.
• GP-Led Transactions/Continuation Vehicles: Transactions where the GP sells a portfolio of assets to a new fund, allowing existing LPs to exit and new investors to come in.
• Net Asset Value (NAV): The market value of an asset minus its liabilities.
• Waterfall: A distribution structure that dictates how profits are allocated among investors in a fund.
• Capital Commitments: The total amount of capital that investors have agreed to invest in a fund.
• IRR (Internal Rate of Return): A metric used to estimate the profitability of an investment.
• OpCo (Operating Company): The entity that directly owns and operates the assets.
• Asset Management Fees: Fees charged by investment managers for managing assets.
• Carried Interest: A share of the profits earned by the general partner of an investment fund.
• Dislocations: Market inefficiencies or opportunities arising from temporary imbalances or distress.
• Bid-Ask Spread: The difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.
• Cold Storage Facilities: Warehouses designed for the storage of perishable goods at controlled temperatures.
• Single Family Homes for Rent: Residential properties owned by investors and leased to tenants.
• Real Estate Secondaries: The secondary market for real estate investments.
• Infrastructure: Assets that support the functioning of a society or economy, such as transportation, utilities, and communication networks.

Madison International Realty: A Global Liquidity Solutions Provider

This summary details a conversation with Ronald Dickerman, founder and president of Madison International Realty, a global private equity real estate firm specializing in providing liquidity to real estate investors. The discussion covers the genesis of Madison, its evolution into a global player, its diverse transaction types, and its strategic outlook in the current market.

Genesis of Madison International Realty

• Early Exposure and Entrepreneurial Drive: Ronald Dickerman's father, a real estate entrepreneur in the Boston area, provided early exposure to the tangible nature of real estate, sparking his interest. This entrepreneurial background, coupled with a desire for a unique business plan, set the stage for his own venture.
• Smith Barney Experience: After graduating from Columbia Business School with a real estate concentration, Dickerman joined Smith Barney (now part of Citigroup) in their real estate investment banking department. His role involved originating and selling limited partnership (LP) interests in real estate to high-net-worth clients, a business that was significant from 1987 to 1991.
• Identifying the Liquidity Gap: Dickerman became an expert in analyzing real estate, packaging it into LP structures, understanding waterfalls, and marketing LP interests. He observed that these investments were highly illiquid, with no established secondary market for investors to monetize their stakes.
• The Dot-Com Era Opportunity: In the mid-1990s, the rise of technology stocks (dot-coms) created an opportunity. Investors interested in the "new economy" sought to sell their illiquid real estate LP interests. Dickerman founded Madison International Realty on the premise of providing this much-needed liquidity by acquiring LP interests at a discount to the underlying real estate's Net Asset Value (NAV).

Evolution of Madison's Business Model

• Enduring Business Model: The early success of prototype transactions and the growing recognition of real estate as a global, sophisticated asset class convinced Dickerman of the enduring nature of his business model. He noted the emergence of sophisticated firms like Carlyle, Starwood, Blackstone, and Brookfield, yet observed a lack of liquidity mechanisms for investors in illiquid vehicles.
• Expanding Transaction Types: Madison's aperture has broadened beyond LP-led transactions. They now engage in:
  • GP-led Transactions and Continuation Vehicles: Facilitating exits for existing LPs and allowing GPs to continue managing assets with new capital. This is particularly relevant in the current market due to a dearth of capital, rising interest rates, and rising cap rates, leading to delayed distributions for investors.
  • Public Market Transactions: Providing private capital to public companies whose shares trade at discounts, offering a creative alternative to traditional equity issuance.
• Global Expansion: Madison has scaled its operations internationally, opening offices in New York, Los Angeles, London, Luxembourg, Amsterdam, Frankfurt, Singapore, and Seoul. This expansion was driven by client demand for liquidity solutions in global real estate holdings. Real estate is inherently local, requiring expertise in specific markets, which led to hiring local talent and a gradual rollout of geographic expansion.

Landmark Deals and Strategic Pivots

• Iconic Asset Acquisitions: Madison has acquired interests in prominent buildings such as:
  • The Seagram Building (New York): A deal initiated by an LP seeking an exit. Madison underwrote the building, recognized its increased rental income, and acquired the interest at a discount, anticipating a future recapitalization by the sponsor (RFR Realty). This transaction was a turning point, highlighting Madison's ability to handle high-profile assets.
  • The Lloyd's Building (London): Acquired through a tender offer for LPs in a German syndication, facilitated by the German general partner. The building was later sold, providing a capital event for Madison.
  • The Trianon Tower (Frankfurt): A joint venture with a Morgan Stanley open-ended fund where Madison acquired a 50% interest in a distressed fund's portion of the building. Successful leasing cycles led to the building's eventual sale.
• Forest City Retail Portfolio Transaction: This was a significant GP-led transaction that represented a strategic pivot.
  • Context: Forest City Enterprises, a public company, needed capital to finance the development of Barclays Center in Brooklyn. They owned a substantial retail portfolio, including assets in Times Square and downtown Brooklyn.
  • Madison's Role: Madison provided a $200 million equity check, acquiring a 50% interest in the retail portfolio. The strategy focused on entertainment-oriented and transit-oriented retail, leveraging high population densities and proximity to major transit hubs.
  • Second Step Transaction: Later, when Forest City (acquired by Brookfield) decided to exit the retail sector, Madison acquired the remaining 50% interest, becoming the sole owner of the portfolio. This transaction made Madison a significant retail landlord in New York City.

Current Market Dynamics and Future Outlook

• Thriving in Volatility: Dickerman notes that Madison's business tends to thrive during periods of volatility due to the increased demand for liquidity. The current environment of high interest rates, limited transactions, and tighter credit presents significant dislocations.
• Attractive Dislocations:
  • Liquidity Needs: More investors are seeking liquidity due to unforeseen capital needs or the opportunity cost of capital, especially with the allure of AI and tech stocks.
  • Larger Discounts: LPs, GPs, and other counterparties are willing to transact at larger discounts due to wider bid-ask spreads.
  • Muted Primary Market Activity: Rational investors are hesitant to sell properties at current high interest rates, anticipating potential rate decreases.
• Sector Focus: Madison is actively investing in:
  • Living Strategies: While multifamily is facing oversupply, Madison is focused on single-family homes for rent, believing the US market is significantly undersupplied (estimated 4 million units). They see millennials as a key demographic, increasingly choosing to rent by choice.
  • Industrial Strategies: Beyond Class A warehouses, Madison is focused on cold storage facilities, driven by changing consumer behavior (e.g., online grocery delivery).
  • Data Centers: These have represented about a third of their investment activity and have performed exceptionally well, driven by the increasing use of data.
• Growth Platforms: Madison has launched a new product line, "Madison Growth Platforms," to provide strategic growth capital to middle-market investment management businesses.
  • Structure: They invest capital in these platforms, with two-thirds to three-quarters going into property acquisitions and the remainder used to buy a minority stake in the operating company (OpCo).
  • Alignment: This structure aligns interests by allowing Madison to share in asset management fees and carried interest.
  • Coaching: Madison aims to coach these businesses on inflection points they themselves have experienced, such as capital introduction, finance, accounting, and data analytics on DEI and ESG.
• Future Vision: Madison aims to join the ranks of real estate firms with double-digit advantages. They see a convergence between real estate and infrastructure, and the possibility of expanding into the infrastructure business. The core focus remains on being a leading liquidity solutions provider for real estate investors globally.

The Human Element and Global Citizenship

• People Business: Dickerman emphasizes that real estate is fundamentally a "people business," revolving around relationships and partnerships. Madison's approach is akin to "marriage-making," fostering long-term partnerships rather than transactional buyer-seller relationships.
• Global Citizenry: Dickerman strongly advocates for being a global citizen, encouraging travel to diverse regions to gain firsthand understanding of local dynamics, which often differ from media portrayals. He highlights that investing is a great equalizer, transcending language, location, and religion, as people universally seek trust and credible returns.

Influence of Columbia Business School

• Network and Experience: Dickerman credits his MBA experience at Columbia Business School with opening doors and providing a valuable network of contacts who have become industry leaders.
• Teaching and Engagement: He has returned to Columbia to teach case studies on Madison's transactions, such as the Seagram Building and Trianon Tower, further solidifying the connection. He praises the school's continued growth and its new campus.