Participate, Profit & Celebrate:
Q.: What is driving your acquisition strategy in this "new normal" economy?
Mr. Park: Good acquisitions for GI Partners result from consistently applying a value-based strategy focused on downside protection to opportunities often overlooked in the market, and the past few years have proven no different. If anything, the “new normal” has highlighted the importance of engaging proactively and directly with portfolio companies to ensure operational value creation milestones are being met and business plans are being successfully pursued.
Q.: Can you elaborate further on the shift in the investment climate and how it impacts your strategy?
Mr. Park: Despite shifts in the investment climate, we have maintained a cautious steady-paced approach and executed on what we do best -driving positive change and growth in asset-intensive operating companies. In an environment where pricing risk accurately is paramount, we feel that we can do this best in sectors where we have significant expertise, such as IT infrastructure and specialist healthcare.

Over the past few years we have been able to take advantage of the financial dislocation and deploy capital even when lending markets were tight. Our buyout strategy has always been one that uses moderate leverage to ensure our companies retain the flexibility needed to operate successfully in a range of economic environments.
Q.: In your experience, how would you characterize the buyout deal structures today, post the financial crisis?
Mr. Park: We custom-tailor the capital structures for each of our companies, but are noticing that the financing markets are very healthy and there is a significant amount of equity capital on the side lines. While lenders are asking for more equity in the capital structure of buyout deals, the basic leverage, pricing and covenant packages are nearing pre-crisis levels. Many of us in the industry have been surprised by how quickly the financing markets have come back, and the current conditions appear likely to stay the same over the near term.

With this backdrop, we are clearly in a competitive market for new investments and I expect to see continued recovery of the M&A market, which will support high valuations. Our response to this environment is to stay focused by turning over every rock in our core targeted sectors and dive even deeper within the various sub-sectors.
Q.: How is GI Partners evaluating opportunities for investing in United States versus European real estate markets?
Mr. Park: Both geographies have the same underwriting criteria and we have been able to source deals off-market or create new operating platforms in the US and Europe, but the kinds of opportunities have been different. For example, we found distressed opportunities in the US to be most attractive in the late 2008 to mid-2009 timeframe since we could acquire senior secured debt in real estate intensive businesses at significant discounts to par value. Since then, we have been very focused on more traditional buyout opportunities in sectors that are deep in our comfort zone.

In Europe, from late 2008 to late 2009, we struggled to find opportunities that could meet our return thresholds and did not see the same distressed debt opportunity as we did in the US. Over the past 18 months, however, we have been able to take advantage of selective asset sales from financial institutions that want to jettison non-core or impaired assets from their balance sheets.
Q.: Per your transaction types, how does GI Partners identify acquisition targets that are"underperforming" in the real estate sector?
Mr. Park: We consider ourselves value investors and have therefore taken advantage of both underperforming and distressed opportunities, however, we rarely engage in operational turnarounds of broken businesses. We have acquired businesses out of formal bankruptcy processes, distressed debt, and companies that have been non-compliant with respect to bank covenants. Whether a value situation is event driven or purely out of favor, we try to take a long-term view on the industry.

Fortunately, we anticipated many of the recent event driven opportunities since they were in sectors that we had been monitoring for a long period of time. For example, starting in late 2006, we were tracking both the sub-prime default rates and CMBS spreads and decided to turn our attention to distressed opportunities within the financial services sector. This culminated in us backing a highly experienced management team and forming a new specialty CRE finance company with no legacy asset issues called Ladder Capital.
Q.: Also, what is your approach the information technology investments - especially in the"out of favor" sub-sectors?
Mr. Park: As you know, we have been active in the IT infrastructure sector since 2001 and acquired 25 data centers in the three year period following the bursting of the technology bubble. Though the sector was out of favor at this time, we had a long-held view that there were good fundamental long-term drivers. As the technology sector recovered, we continued to find opportunities, but this time by proactively approaching businesses that had balance sheet distress.

Now that the sector was back in favor, a number of IT-related businesses needed a partner to help fund their ambitious growth plans and access the capital market. Hence, over the past decade, we have been able to acquire IT infrastructure assets at a discount when the sector was out of favor and technology-related businesses at competitive entry multiples while the sector was in favor because of company-specific distress.
Q.: Does GI Partners have a turnaround strategy post buyout of an underperforming business?
Mr. Park: We generally avoid operational turnarounds of broken businesses. That being said, we do a lot of work early in the investment process to develop both strategy and tactics that we believe will yield long-term value. To augment our internal expertise, we often work with industry executives and consulting firms to develop these insights.

Significantly, we develop 100-day as well as multi-year plans before we close an investment. Plans may include significant additions to the management team, identifying areas for further investment or areas for divestment, and the addition of additional resources to marketing, sales and finance functions, for example. Whatever the specifics may be, we want to immediately implement our plans with a great sense of urgency.
Q.: What are your thoughts about investing in the commercial real estate markets in North America? As you know, there was and continues to be a record number of reorganizations in the commercial real estate sector.
Mr. Park: We are very focused on potential transactions across the real estate sector and have found this to be a key area for generating compelling returns, particularly given the significant distress and, what we believe to be, mis-priced risk. As an example, we were able to take advantage of distress at Macerich in 2009 by structuring a joint venture to acquire FlatIron Crossing Mall, one of the company's marquee assets.

While the current interest in core-assets is driving valuation up for many high quality assets in Tier I markets, we believe there will continue to be distressed opportunities in the sector given a confluence of factors.
Q.: Can you elaborate on the "confluence of factors?”
Mr. Park: Yes. There is still about $1.5 trillion of commercial real estate debt maturities in the next four years and the FDIC has seized over 300 banks since the 2008 crisis. Apparently, there are over 900 banks on the watch-list. Special servicers currently service over $80 billion of commercial real estate from about $10 billion less than 2 years ago. We believe that this environment is going to continue to create opportunities for recapitalizations, rescue financings and acquisitions across the commercial real estate sector.
Q.: What are the risks and opportunities of investing in real estate distressed debt securities versus assets?
Mr. Park: The similarity of investing in distressed debt securities versus the underlying assets is that they both start with a very detailed underwriting. That underwriting will inform us as to whether there is value in the various parts of the capital stack. This determination will lead us to make the best risk/reward decision regarding which security in the stack holds the greatest value. If it is the equity then we will acquire the asset, if it is the fulcrum security that is more senior in the structure, we will often try to acquire that security. We are really agnostic with respect to investing in securities or the underlying assets, we just want to invest in the best risk/reward opportunity that meets our targeted return criteria.
Q.: Congratulations on partnership with California Public Employees' Retirement System (CalPERS) per the diversified CalEast Global Logistics portfolio. What is the nature of this joint partnership?
Mr. Park: GI Partners was hired by CalPERS to set the go-forward strategy for CalEast after being introduced to the opportunity following a detailed, CalPERS-directed “real estate manager review process.” GI Partners was awarded this mandate as part of a larger CalPERS real estate restructuring effort to shift assets to managers who outperformed peers managing CalPERS investments during the real estate market downturn.
Q.: What expertise does GI Partners bring for maximizing returns for CalPERS partnership?
Mr. Park: GI has brought to the assignment its expertise of evaluating strategic alternatives for each company and joint venture within the CalEast portfolio. We are currently implementing an immediate plan to maximize income through various initiatives and recently sold a large asset within the portfolio at a price well in excess of appraised value. Overall, we are confident in our abilities to work closely with CalPERS to achieve the best outcome possible for CalEast given our successful track record in managing similar infrastructure-related operating companies and assets in the past.
Q.: In terms of buyout strategy, does GI primarily execute a stand-alone or a co-investor deal strategy?
Mr. Park: The vast majority of our investments have been as the “control” investor. However, we will also consider participating with another like-minded firm if there are compelling reasons to do so, such as regulatory requirements for a diverse investor base as is the case with depository institutions in the bank industry.
Q.: In your experience, how do you drive value per"buy and build" strategy?
Mr. Park: We have used a buy and build strategy in many of our investments very successfully. I believe the key success factors for this value-driver are (1) a very clear strategy for consolidation with a clearly articulated view of the benefits of such a strategy, (2) a proven management team, and (3) a disciplined acquisition strategy that can be funded from cash flows or moderate debt financing. Creating scale for the sake of scale doesn't make sense. Instead, clear advantages of scale economies have to be defined.
Q.: How do you align with management of the portfolio company for platform acquisitions?
Mr. Park: We seek to back teams that have proven histories of acquiring businesses in the industries we are targeting. An example is Plum Healthcare, where we committed to a senior team that has been successfully turning around add-on acquisitions in the highly regulated skilled nursing facility sector for over 10 years. Importantly, at Plum and our other portfolio investments, we define our acquisition criteria before we make a single acquisition and we adhere to the plan.
Q.: How does GI Partners make decisions to exit investments?
Mr. Park: Evaluating exits for our investments is a continuous and dynamic process. We regularly evaluate exit options for a given investment, weighing business prospects with the value of continuing to build the business through a longer hold period. We also assess the trade-offs of selling now versus holding longer while balancing the need to generate liquidity for our investors.

Operating in the mid-market often affords us the opportunity to consider both the option to take a company public and sell in the after-market versus sell to a financial or a strategic buyer. The ultimate decision often comes down to where we can generate the best return for our investors and support the longer-term goals of the management teams with whom we have partnered.
Q.: As IPO market continues to gain momentum; do you believe there will be more IPO's by PE backed companies?
Mr. Park: I do see more IPO opportunities for PE backed companies, and as long as the economic recovery continues and the credit markets are accommodating, I believe that the LP community will be quite surprised by the level of exits in general. This will be driven not just by the IPO market but also from discrete sales of assets or businesses in the M&A market.
Q.: On a personal note: What book are you currently reading in between executing deals?
Mr. Park: Who's Got Your Back by Keith Ferrazzi. I usually avoid books like this but I enjoyed his first book, “Never Eat Alone” so I just started reading this book. It is an easy read and a great reminder that in a society that is growing evermore shallow, the true value of strong individual relationships and how to genuinely build them.

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