Market dynamics are forcing real estate investment managers to rethink their strategy as the industry shifts to focusing on enterprise value. At a recent invite-only virtual roundtable for CRE executives hosted by Juniper Square, Drew Murphy, Partner and Head of Berkshire Global’s Real Estate Investment Management advisory practice, and Josh Anbil, Founder and CEO of Anbil Consulting, emphasized that creating enterprise value doesn’t happen overnight. It requires planning and a focus on business strategy, culture, and incentive planning to attract and retain the best talent.
Defining enterprise value
The concept of enterprise value is relatively new for private markets GPs, especially in CRE, where many of these businesses have grown organically over time. As Anbil noted, as recently as a decade ago, thinking about building a business was not top of mind; instead, it was about creating the best deal team. This has now changed.
While no standard definition exists, profitability and capacity for future growth are the primary drivers of enterprise value. Non-financial metrics such as business strategy, company culture, and compensation—especially as it drives retention—are also critical.
When firms don’t thoughtfully approach building enterprise value, this reflects poorly on the leadership team and broader business, especially during a transaction. While this may seem intuitive, when the time comes for a strategic capital transaction, many leaders underappreciate how much these elements heavily influence how a partner evaluates and values their business.
People are the most significant asset
Murphy pointed out that people drive the business plan, making them the most valuable asset. Yet, those people are among the largest expenses—on average, 70% of a firm's expenses can be attributed to costs associated with people, Anbil noted.
To be competitive from an EBITDA and talent perspective, GPs are looking for ways to attract the best talent while focusing on profitability.
On the talent front, the best people want to work for companies with a clearly defined strategy, a great company culture, and competitive compensation. Top talent commands a premium, and companies are finding ways to break down traditional compensation frameworks to reward those who outperform fairly. In addition to cash compensation, employee equity plans are increasing in popularity, with nearly 80% of independent firms having issued equity to non-founders, up from roughly 30% just ten years ago, according to Anbil. Equity is an effective way to create alignment between leadership teams and business outcomes.
But Murphy and Anbil pointed out that there is no one-size-fits-all compensation model. Strategic capital partners want to ensure that, in the event of a change of control, key talent is incentivized to stay at the business to guarantee continuity and continued success.
Compensation plans should meet each company's needs and future goals, with communication and compensation inextricably linked. Once the plan is set, it’s crucial to effectively communicate both how the plan works and its benefits to the individual employee. Overcommunication and clarity are key. Absent a strong and clear story, employees will write their own narrative, and, all too often, it’s not positive.
To offset people costs, many GPs chose to outsource non-enterprise value-building back-office tasks to reduce operating costs—specifically, the outsourcing of functions that every GP has to do and thus are "undifferentiated," including fund administration. Juniper Square has seen this shift firsthand, adding over $100B of assets under administration and more than 350 administration clients in the last four years.
Cultivating value through strategy and culture
Compensation's critical role in building enterprise value notwithstanding, it’s not a silver bullet for retention—culture and strategy heavily impact the attractiveness and durability of any business. GPs with a clearly defined mission and a focus on culture are in the highest demand amongst top talent.
In conclusion
Both Murphy and Anbil emphasized the importance of being proactive and prepared. The markets are shifting, and the firms that will thrive through the next cycle are those that focus on building enterprise value. At the end of the day, buyers expect a continued growth rate, which depends on the people, strategy, and culture being there to drive the business plan.