Le Nouvel Observateur
23 August 2007
The crisis as seen by one of its actors
Colony: The Laws of the Global Capitalism
Are investment funds the origin of the new crisis? Will they be its victims or beneficiaries? A king of the sector explains his philosophy...
"It all started in California, in my father’s grocery store in Culver City. He was not the one who taught me financial performance calculations, but he taught me values that make for long-term success: integrity, reputation, perseverance...” Tom Barrack speaks in a soft voice and with an engaging smile in the video presenting his investment fund. 120 institutional investors that have entrusted him with 5.6 billion dollars of their own funds finance Colony Capital, created in Los Angeles in 1991. Thanks to this solid cushion, he can borrow and invest prolifically in the four corners of the planet: offices, luxury hotels, casinos, bars, restaurants... but also vineyards, supermarkets or soccer stadiums. From Taipei to Las Vegas, from Paris to Tripoli, Colony Capital has invested over 18.6 billion dollars in 127 deals over the past fifteen years, with an average annual return on investment of over 21%. Paradoxically, the stock market crisis does not frighten him.
“Frankly, I prefer this market to the one a year ago!" Says Tom Barrack, "We had been waiting for this for some time. We were overheating - it is a necessary correction... not a crash!” Nevertheless, will this cautiousness complicate his work? “It will get rid of amateurs! But serious players, such as Colony, will be able to seize new opportunities. The basis of our business is to buy when everyone else is selling...” A good summary of these financiers’ business whose success has been until now spectacular.
“My history is the success story of an immigrant family: my education is American, but my roots are Lebanese”, explains Tom Barrack, whose parents emigrated to the United States. The history of this entrepreneur – whose fortune, valued at 1 billion dollars, ranks 374th in the last Forbes ranking – is also that of the formidable acceleration of financial globalization since the end of the 1980s. Colony Capital rapidly internationalized, contributing thus in exporting the demands of Anglo-Saxon financial capitalism. Today, these several hundred capital investment funds, or private equity funds, call the shots with all corporate bosses.
The man first learned the ropes working ten years with the wealthy Bass family in Texas. He searched for industrial companies that were no longer working, turned them around by providing capital and management. Then he went to work for himself, applying family lessons learned. His father had succeeded by selling oranges out of season, when one could not find any fruit any time of year. Tom made his fortune buying buildings when the cost per square foot was dropping, then portfolios of bad debt and companies in crisis...”The basis of the business," explains this pragmatic strategist, "is to work against the cycle: to spot dysfunctions that others have not seen, or opportunities that others were not able – or did not dare – to seize...”
Depending on the period, these hidden nuggets can be found on different continents and in different sectors. “When I founded Colony in 1991, the real estate crisis was raging, dragged down by American savings and loans bankruptcies.” So, we went into real estate. Then, like financial alchemists, Colony’s teams reinvented other winning formulas: once the real estate crisis was over in the United States, it exploded in the United Kingdom and in France. Whereas American funds remained timid outside their borders Colony started – in the mid-1990s – to buy up assets the Credit Lyonnais was selling to pay back its debts...
“While our competitors are all comfortably set up in New York or in Los Angeles, we are Italian in Italy, French in France, Japanese in Japan...”, summarized Barrack in Colony’s promotional video. Tom Barrack himself spends about half his time between Europe and Asia. In summer, you can see him most often between Saint-Tropez and his luxury hotels on the Costa Smeralda in Sardinia. “Right now, we tend to sell on the American continent: 70% of our assets are located outside the United States."
The secret of its internationalization, underscores Tom Barrack, is the quality of its teams: “If we have such a solid position in France, it is thanks to Sébastien.” Sébastien Bazin, Managing Partner of Colony Capital Europe, joined the fund in 1997. Over the years, Colony Europe, in close partnership with Eurazeo (the Lazard family shareholders’ fund), has become an entity quasi-independent from the American headquarters. “We raise our own funds: for Colyzeo II – 1 billion euros – 62% of the capital is of European origin," says Sébastien Bazin, who has become one of the six members of Colony’s global executive board. “We identify and negotiate our own transactions: all I need is Tom’s green light...” In Colony France’s satchel, there is quite a bit of office real estate, particularly at La Défense, and operational companies: the Buffalo Grill restaurant chain, the Lucien Barrière casinos or the Chateau Lascombes vineyards, and a strategic participation in Accor. But also 60% of the PSG soccer club (with Butler Capital and Morgan Stanley) and 9.1% of Carrefour alongside Bernard Arnault... "We are more eclectic in our choices. But all our acquisitions have underlying real estate assets we consider undervalued”, explains Sébastien Bazin, whose small Parisian team does not include any American expatriates.
Since they do not have the same resources as their large competitors, Barrack’s teams differentiate themselves by being always one step ahead. After real estate, Colony started investing in luxury hotels, tourist resorts, then casinos whose potential was restrained by regulations. His latest bet almost gives the shivers: the acquisition of 65% of Tamoil – the Libyan public refinery and service station company – for 2.6 billion euros. Barrack spotted the ingredients that interest him: "Libya is normalizing its relations with the United States, the energy sector is promising and the deal was complex." And tomorrow? "We are exploring new avenues such as the acquisition of land polluted by the army or by petroleum or chemical industries," says Sébastien Bazin.
Despite being rooted in the local economic fabric, Colony’s acquisitions must follow global financial capitalism’s logic, that is to say to ensure a maximum return on investment to shareholders (pension funds, insurance companies, banks...). Like other firms of this sort, Colony acquires its targets by borrowing money (leverage effect), but strives to respect a reasonable rate of indebtedness. Then, it must manage theses companies with rigor, develop them, and register a significant capital gain at resale... for the fund and its management’s profit. The partners’ individual enrichment is so outside the norm that even American public opinion is starting to be stunned.
Stephen Schwarzman, manager of Blackstone, just collected around 7 billion dollars by listing his fund! Naturally, Tom Barrack believes this polemic is inappropriate: "We take risks; we help companies develop; investors are happy.. Where is the problem?" Listening to him, problems never exist. Less at least than the inexorable rise of the Asian continent. "Whether one likes it or not, the future is over there: in China, in India," remarks Colony Capital’s boss. "But we have not yet figured out how to transpose our know-how there."
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