Creating a New Private Equity Business Model with Lean Six Sigma

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A Discussion with Former Motorola CEO Chris Galvin and SSA & Company President, David Niles

When Chris Galvin decided to explore the real estate investing market for a new private equity fund, he wanted to make sure of one thing: whatever he did needed to be significantly different than the rest of the market. In some ways, his entire career was based on innovation. His father Bob was the legendary CEO of Motorola, and Chris was at the helm of the business when it developed the breakthrough Razr product. As a pioneer across multiple industries, Motorola served as a business incubator – investing in a number of disruptive technology companies.

Chris wanted to push this legacy of innovation into his new private equity venture, Harrison Street Partners. He knew that the “follower” strategies other funds had adopted might work for a few years, but wouldn’t have the structural advantage to generate long-term growth. And if you aren’t in it for the long term and to make big impact, why do anything?
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Developing a new business model that was also sustainable was the challenge – and today, with more than $4.75 billion AUM, Harrison Street has clearly hit upon the solution. How have they done it?

During their exploratory phase back in 2006, Chris and his Harrison Street partner Chris Merrill decided to analyze the real estate business as the source for their investment dollars. To find the opportunities that others were missing, they used tools they knew well from their former lives: Galvin as the former CEO of Motorola had as much as anyone alive seen the power of data-driven thinking to drive innovation in a business, and Chris Merrill, who over his career acquired and/or developed over $10 billion of real estate in both the U.S. and Europe, knew how to create differentiated real estate products. Together they spent a weekend analyzing the real estate investment business to isolate the key defects in investing in assets; financing the assets; and in managing the assets once they are purchased. This work revealed two key insights:

  • Real estate categories that had consistent demand from consumers – e.g., parking garages and student housing – would have the stable cash flow characteristics to avoid the catastrophes of previous real estate cycles
  • Smaller size deals had less competition (and thus higher returns), but were difficult to manage at any real scale (i.e., it is hard to commit meaningful capital to deals of less than $10M as a large fund)

These two fundamental insights drove the Harrison Street strategy: to find a way – that others in the marketplace haven’t yet tried – to invest significant dollars in a high number of consistent demand properties. The challenge was how to do this in an economically viable way: finding and managing a set of smaller investments but having enough scale to make the opportunity big enough for large investors to take notice. The “how” of this strategy was lean six sigma. And the innovation lay in using lean six sigma beyond its roots in manufacturing/production applications founded at Motorola in the 1980s. Galvin and Merrill took the six sigma they knew, and leveraged it to become the mechanism for developing their private equity business model.

“Most people can’t do what we do – managing 270 properties across 38 states with a lean team of 50 professionals,” says Galvin. “Being innovative with lean six sigma was central to our being able to execute this strategy – and to deliver top decile returns.”

The typical real estate investment process is labor intensive and somewhat bespoke depending on the character of the property, the make-up of the various parties involved, and the background of the professionals involved in the transaction. Sourcing techniques, setting of terms and negotiation, financing structures, management and disposal of assets – all of these vary. Using lean six sigma processes, Harrison Street has spent years figuring out where bottlenecks are created in their work processes. The result is that the team has systematically designed ways to streamline, standardize, and optimize the core processes of their business. For example, they have designed a “lean assessment” to quickly and in a standard way perform due diligence on potential investments. This saves them time, provides a more reliable outcome, and allows Harrison Street to track assessments over time to judge market trends.

As a secondary, but equally valuable, result, Harrison Street has created a process and performance driven culture, not one of big personalities and reliance on “star” executives. This helps them better manage the internal aspects of the firm and create a sustainable human capital platform that they can grow predictably.

Harrison Street brings this philosophy and approach to their operating partners as a value-added component of their relationship.

“Long-term, being known to operators as a true value-added partner in the market attracts good deals,” says Chris Galvin. “By providing lean six sigma improvement techniques and resources to our operating partners, we demonstrate to them that we can be much more than a source of capital. We are proving that we are in fact the best overall partner in the market.”

The type of support Harrison Street gives its operating partners varies broadly. The firm has shown health care facilities how to improve retention with registered nurses; it has also helped property managers increase occupancy rates. Harrison Street uses a “pull” strategy – never forcing partners to use their resources or approach, but instead providing resources when the partner needs it.

Harrison Street has developed a team of seven lean six sigma “Master Black Belts” who operate within the firm, and provides training for both its internal deal makers as well as operating company partners. Over the years, Galvin and Merrill have developed their own “operations playbook” they use to educate new hires to their approach.

In describing his strategy for business – one that closely echoes his father’s – Galvin explains, “When you are so far ahead of the competition that everyone thinks you are crazy, that is the safest place to be, because no one can catch you.” It appears that Harrison Street is doing just that.

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