January 4, 2016
Interviewed by: Zoe Hughes
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Specialism Key to Long-Term Performance

Berkshire Group CEO Chuck Leitner talks about how the firm’s independent board of directors are helping shape its growth, how it has expanded into operating platform venture capital investing, and why it won’t be turning into a multi-strategy manager.

Berkshire Group CEO Chuck Leitner talks about how the firm’s independent board of directors are helping shape its growth, how it has expanded into operating platform venture capital investing, and why it won’t be turning into a multi-strategy manager.

Specialism Key to Long-Term Performance
With Chuck Leitner of Berkshire Group

Zoe Hughes, Privcap: I’m joined here today by Chuck Leitner, CEO of Berkshire Group. Chuck, thank you so much for joining me today.

Chuck Leitner, Berkshire Group: It’s a pleasure.

Hughes: Chuck, you joined Berkshire in 2013 to help transform the firm from a family-owned business to an institution real estate investment manager. One thing you and founders did, which I find fascinating, is that you actually appointed a Board of Directors for a private firm, including independent directors. Why do that?

Leitner: [There are] a lot of very good reasons for that and it’s working really well. We aren’t transitioning from family-owned. The business is still very much family-owned by the founding family and that is going to be the state of ownership for Berkshire for as far as the eye can see. They’ve got a very long-term view, but the transition from investing only family capital in multifamily real estate to investing client capital and creating that fiduciary business is a big change.

That’s part of why I joined the firm. That’s my background, so it’s a great match from my perspective with a very owner-operator culture, which is really exciting and energetic. I think it makes a big difference. But, when I met the family initially, they said very specifically they wanted to create a board and they wanted it to be a governing board, albeit [with] a single shareholder, essentially.

I think there are two real reasons they wanted to do that. One is that they wanted to bring in outsiders at a board level who could give very valuable, strategic direction and support for me and the management team, and for themselves, to really understand the fiduciary business. So, our three independent board members all come from long careers in the fiduciary investment-management business, being on the client’s side, the manager’s side or the operator’s side. That’s great expertise, wisdom and perspective that I think both the family and the management team value.

Also I think they are doing some very smart family, estate, succession planning. This is first generation—a family started this business and the second generation is now just coming into the reality stage of what’s next. They’re very thoughtful and careful and long-term thinking about making sure some external governance perspective helps assure the long-term sustainability of the family business through generational success.

Hughes: In terms of the vision for Berkshire, obviously in, say, the last 10 years, you’ve expanded. Not just beyond multifamily, but also a bit of venture-capital investing in operating platforms, JVs on the medical-office side, student housing and various other sectors. Is Berkshire expanding the strategy?

Leitner: We are, but carefully. When I took this job, a lot of friends called and said, “Are you going to be doing multi-strat strategies? Are you going to be doing office?”

Hughes: Because, obviously, you are former Global Head of RREEF.

Leitner: Yeah, and I have that background. But the answer really is “No, that’s not the strategy.” The multifamily is a core competency that we’re very committed to and, as I said earlier, we can play in different parts of multifamily at different times of the cycle. We can leverage our operating platform to be, we think, better investors by having that.

The venture’s business has really been a nice, call it a niche opportunity initially, but we think it may grow to being more than just a niche. It really started with the family—the family office said, “We want to put some capital into some high-yield, emerging operating company, early-stage private equity. Real estate, operating companies, non-multifamily.”

[That’s] things like senior housing, student housing and medical office, to which one might say, “How’s that’s really synergistic with multi?” Actually, a lot of the demographic and operating characteristics of medical office have to do with a lot of the things we like about market selection.

The Krupp family (George and Douglas, who are the brothers) have developed a strong perspective on what it takes to be a good operator. So, brining that to an investment strategy that involves operating companies, we think, is actually a very synergistic activity.

Hughes: Where’s next?

Leitner: It’s interesting. I try to come up with something really exciting in terms of answering that question, but more of what we do is a lot of what’s next. We think multifamily clearly is an institutional asset class that’s here to stay. Thirty years ago, that wasn’t true, but multi has definitely become a very permanent fixture in the traditional institutional-investor real estate-portfolio allocation. We think there’s growth in the business because of that. A single-sector expert and specialist can add value and we think the investors see that.

We’re branching into more low-risk strategies. We have an opened-ended core fund now that will appeal to the longer-term investor in the space. And, as the quality of multifamily goes up and the long-term performance continues to be proven out in an institutional portfolio, we think there’s a lot of growth there.

Value comes and goes, based on where you are in the cycle. We think we’re positioned to do more funds in value-added when it makes sense to do it. We expect to do that and we have a growing, separate account business, which is normal for a company like ours.

Hughes: You talk about being a specialist investor. Obviously, as the former Global Head of RREEF—specialist or generalist? What is the right answer at this part of the cycle?

Leitner: I’ve sort of voted with my feet, haven’t I? The honest answer—and it sounds very diplomatic, too—is both. It really depends what the investors want. I think you’ll see that a lot of investors experience both and they actually compare performance. That’s probably the most straightforward answer. We certainly think, and I think in terms of coming over here, that that combination of operating and investment is powerful.

In many ways, [that’s] what drew me to RREEF 25, almost 30, years ago when I joined—they were more of an investor-operator model at that time. And, through growth and changes in the market and ownership by large, financial institutions, that became a harder model to maintain. But, when I thought back to my experience at RREEF, it was the time where I really felt the formula was the right one in terms of delivering performance for our investors and having a long-term model that works.

You do have to commit to being a specialist, which sometimes can be a little nerve-wracking. If your particular brand of tea is not in favor, there is some risk in that. But, again, as I said earlier, multifamily and some of the other sectors have allowed investors to play in the sector in different ways at different times. So, we think we’ll be investing pretty consistently in multifamily, but it may be different parts of multifamily at different times in the cycle.

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