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Market insight: Mastering Manhattan

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MG Capital specialises in New York’s unique luxury residential market. In our Q&A, founder and chief executive Eric Malley outlines why his firm’s real estate niche is so popular with global investors

MG Capital has specialised in luxury residential property in Manhattan for almost 20 years, what makes it a unique market for investors?

I founded the firm in 2000 as a vertically integrated platform that has enabled us to become an owner-manager. That is rare to find in the asset management world because we invest in real estate that we thoroughly understand how to manage and operate. Today we are the largest owner-manager of one, two and three-bedroom luxury properties in Manhattan. Those properties are diversified across more than 100 buildings and in 15 different neighbourhoods with a global investor base. We have both institutional and individual investors from every state in the US and from dozens of countries, including pension plans, endowments, family offices, and private investors.

We invest in an asset class in which we have extensive expertise and a stable client base given we provide long-term housing to Fortune 1000 firms. Today we have more than 215 corporate tenants, including banks, universities, hospitals, not-for-profit organisations, government, pharmaceutical, and technology companies. So while our assets are exclusively residential, they are leased almost entirely to Fortune 1000 firms.

You have seen an increase in families investing in your sector. What are the advantages of investing in this asset class?

It is very different from writing a cheque for $5, $10 or $15 million dollars and being an investor in a single building. In this case an investment is diversified across more than 100 properties. The revenue streams that it generates are highly diversified in that they come from a myriad of different companies as well as industries. Our investment strategy appeals to family investors looking to preserve intergenerational wealth. Moreover, we are the only real estate private equity fund in the world that is completely debt-free at both the fund level and the property level.

Tell me more about the debt-free model and the other unique aspects of your offering, including your proprietary analytics and the Capital Protection Provision.

The debt-free model makes our offering more attractive from the investor’s perspective because 100% of their capital commitment or their invested amounts with us is collateralised by debt-free Manhattan real estate. It is an ideal way for them to diversify their portfolios and gives them access to real estate investments that are exceptionally different from what you would find in other funds or direct real estate investments.

We follow a completely emotion and bias-free strategy. This is driven by our proprietary analytical model, which uses intrabuilding arbitrage for asset selection. We use metrics that help us predict factors such as asset elasticity, cyclical income, and the success of our tenant relationships. This helps us to establish how the asset is going to perform over time in our wider portfolio. We do not make investment decisions based on gut.

Our Capital Protection Provision means that if for any reason an investor’s capital commitment is reduced by a dollar below the amount they originally invested, we will return the General Partner’s profit sharing interest in an effort to make them whole. We see our investors as being our partners, and you cannot have a partnership where one side is earning and the other is not.

What has been your track record for investment returns and your policy on annual distributions?

Investors are looking for track record, stability and consistency of performance. For the last 11 years we have outpaced the S&P 500 nearly four to one, which represents an investment multiple of about 2.6x. In 2017 we delivered to investors, after carried interest and expenses, an internal rate of return of more than 13%.

Most real estate private equity firms do not extend distributions to investors. We distribute almost all of the income generated across the properties by the corporate tenants to the investor base each year.

You’ve recently opened a new fund, MG Capital Fund IV, to enable a substantial increase in your apartment portfolio, can you share more about your plans?

This is our fourth investment fund and our sixth investment vehicle. Our total past and present portfolio value is $1.18 billion in assets and we have laid the groundwork and infrastructure to acquire 2,200 new properties over the next 60 months. That is roughly $5 billion in acquisitions. In doing this, we are enabling investors from around the globe to hold an equity interest in hundreds of income-producing properties, all of which are diversified across 100 buildings in 15 different neighbourhoods in Manhattan and offer annual distributions.

Communicating with your clients is important to you. What are some of the ways you keep them informed?

One of the things that we are extremely proud of is our transparency and oversight. Very few investment managers that operate a real estate private equity fund have a web portal where you can watch videos, meet the team, listen to live quarterly calls, and learn more about historical performance just by clicking a PDF. We believe in proactively communicating with our existing and prospective investors, even before they have a question.

Why is it important to MG Capital to coinvest alongside your clients?

We match any investment that comes in by 2%, which is the standard amount that you’ll find amongst most alternative investment managers in the US. But more importantly, our business always has a considerable amount of skin in the game. When our third fund closed, our audited financial statements showed that we had a 4.65% financial interest in that fund.

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MG Capital Management L.P.

405 Park Avenue, Suite 500

New York, NY 10022



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