1960s - 1970s: The Beginning
Sam Zell began, his entrepreneurial career in 1961, during his junior year at the University of Michigan, with the launch of an apartment management business in the student housing market. He invited his fraternity brother, Bob Lurie, to join him, and after graduating from law school, Zell sold the local business to Lurie, and moved to Chicago.
Three years later, Lurie joined Zell’s new investment firm in the Windy City, and together they built what today is known as Equity Group Investments (EGI). Zell served as the partnership’s idea man and deal generator, and Lurie thrived as the pragmatic behind-the-scenes planner.
In the late-1960s/early-1970s, massive overbuilding of commercial property forced developers to abandon their projects in the face of skyrocketing interest rates on loans. Seemingly overnight, the industry crashed and fell into a recession. Zell and Lurie took advantage of the available marked-down, distressed property assets, and assembled a solid portfolio of high-quality apartment buildings in mid- to small-sized cities where there was little competition to buy. The partnership adopted a simple acquisition strategy – invest in properties that would pay for themselves by generating income over time. This approach was unique in an industry that thrived on buying and flipping real estate in search of fast profits.
The recession, which started in the apartment industry, soon spread to the retail and office building markets, and Zell and Lurie broadened their investment scope. They added staff, and developed in-house property management functions for each property sector. The partnership grew into a company.
EGI earned a reputation for astute investment and strong asset management, as well as for its uniquely casual culture, which was based on meritocracy, integrity, an appetite for growth, and an ability and willingness to operate contrary to conventional wisdom.
1980s: Diversifying beyond Real Estate
The next decade signaled the evolution of EGI beyond the real estate industry. With the recovery of the industry underway, the unprecedented real estate deals of the 1970s were unlikely to be repeated in the near future. Zell and Lurie determined that the same fundamental investment philosophy that had enabled them to succeed in real estate should be applicable to other industries. So, the partners began sourcing distressed assets that could be repositioned to realize growth.
EGI acquired ownership stakes in asset-heavy companies with valuations below replacement costs, and made investments across a range of industries, including: rail, container leasing, passenger cruise, plastics packaging, agricultural chemicals, and industrial manufacturing.
EGI also capitalized on significant changes brought about by the 1981 Tax Reform Act, which greatly enhanced the longevity and value of net operating loss carryforwards (NOLs). The public equity market failed to notice the incremental value of these tax characteristics, and Zell and Lurie recognized this market misperception, making investments in companies with significant tax attributes that delivered superior returns. Among the investments was Itel Corporation, which today is known as Anixter International and has a total market capitalization of $1.6 billion.
As the 1980s came to a close, the cyclical commercial real estate industry came full circle into another recession. Over the next several years, EGI amassed a large portfolio of real estate assets that eventually served as the catalyst for three of the largest real estate investment trusts (REITs) in the industry. Today, EGI’s public U.S. real estate assets largely comprise investments in Equity Residential, Equity LifeStyle Properties and Equity Commonwealth. Zell sold Equity Office to The Blackstone Group in 2007 for $39 billion in what was at the time the largest LBO in history.
1990s: Good Companies with Bad Balance Sheets
The 1980s brought about a newfound availability of capital in the form of high-yield bonds, which drove a wave of leveraged buyouts and recapitalizations, leaving many companies with balance sheets that required significant growth to support their debt. EGI recognized these excesses could not endure and anticipated a market correction. In 1990, the firm raised a $1 billion pool of capital targeting investments in companies with solid operations and unsustainable capital structures. Ultimately, the Zell/Chilmark fund, which completed its subscription offering in 1990, made investments in the grocery, radio, bedding, sports equipment, drug store and airline business sectors.
In 1999, Zell turned to real estate outside of the U.S. by launching Equity International, which has fostered the growth of a number of companies and brought four into the public markets.
2000-today: Continuing our Opportunistic Investing
At the turn of the century, as the venture capital market focused on dot.com companies, EGI invested in a number of early-stage healthcare companies as well as other growth companies where the risk/return tradeoff ratio was attractive. The firm also focused on the structured finance arena.
One of EGI’s key initiatives since 2000, has been to take meaningful positions in debt securities with the flexibility to hold the investment, or to actively participate in a restructuring that results in a significant ownership stake. This is the underlying investment philosophy that EGI continues today.
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