On summer weekends in Santa Barbara, Calif., you can find real estate investor Thomas J. Barrack Jr. on horseback, mallet in hand, chasing a polo victory at 40 mph. Forced by the passage of time to give up his bruising first love, rugby, Barrack, 48, finds polo no less invigorating. But then again, Barrack is the kind of businessman who counts as a key trait his "ability to push through a comfort barrier."
Now, that ability is being tested. One of the first buyers of Resolution Trust Corp. assets--in the early 1990s--Barrack racked up average returns in excess of 80% on behalf of investors such as Cargill and GE Capital Corp. He and his team bought up large portfolios of real estate and mortgages--often leveraging their capital with inexpensive borrowings--then quickly sorted, repackaged, and sold them. But such success bred competition. With the RTC fire sale over, Barrack and Colony Capital Inc., the Los Angeles firm he founded in 1991 with Continental Airlines Chairman David Bonderman and four other partners, are facing a roster of deep-pocketed rivals even as opportunities in the U.S. are shrinking.
SCARCE PLOTS. Last year, Barrack raised $625 million for a new limited partnership, Colony Investors II. But competitors including Tiger Management Corp. and Apollo Advisors together raised nearly $2.5 billion more--meaning prime pieces of undervalued real estate are growing scarce. Notes Michael D. Frazier, head of GE Capital's $17 billion real estate company, sometimes a Colony rival: "The market today is flush with capital, and the game is much tougher."
To stay ahead of the pack, Barrack is looking abroad. He's also investing in operating businesses--still choosing cheap, ill-favored assets--which he plans to hold for five to seven years. In March, Colony announced its third foray into the depressed Hawaiian resort market: Sources say Colony could get the Kapalua Bay Hotel & Villas for a quarter of the $105 million its current owners paid. In December, Colony bought the Ritz-Carlton Mauna Lani for $75 million--less than half what it cost to build. Barrack is also looking at retailing and fast food. Last year, he joined Virgin Group chief Richard Branson and others to buy Britain's MGM Cinemas chain from Credit Lyonnais. Day-to-day operations are left to others: Hilton and Sheraton, for instance, run the Hawaiian hotels.
Doing such globe-girdling deals keeps Barrack in constant motion. One week in four he's in Los Angeles, where he gets to his office at 6 a.m. He has an apartment in New York. Even New Year's was a working holiday: Barrack, his second wife, Laurel, and his four children, ages 5 months to 20 years, spent it checking out the Mauna Lani. When Barrack does kick back, it's usually at his 1,000-acre horse ranch in bucolic Santa Ynez, Calif.
Barrack's backers hope his varied experience will give him an edge over rivals. The son of a Southern California grocer, Barrack earned a law degree at the University of San Diego, ran his own real estate management firm, did a stint on Wall Street, and managed Texas billionaire Robert M. Bass's property investments before founding Colony.
"BRILLIANT." In 1988, Barrack bought Westin Hotel Co. for Bass, enticing Japanese investors to ante up a big chunk of the $1.5 billion price. Within a year, he sold two of the chain's 85 properties for $700 million. Donald Trump paid $410 million for one, New York's Plaza Hotel, just before the hotel market collapsed. Colony recently bought some of Trump's debt from the Citibank-led syndicate that financed the purchase. It is perhaps a tribute to Barrack's charm--marked by unfailing geniality and an intense focus on whatever person he's talking to--that Trump calls Barrack "a totally brilliant guy."
Barrack first got into RTC deals in 1991, when Colony, backed by Bass and GE Capital, bought $1 billion worth of properties and mortgages for $510 million in cash. Then, he blazed a high-risk trail, paying RTC as little as 35 cents on the dollar for cast-off land and apartment houses--the kind of properties that would go for as much as 10% over their appraised value a few years later. "Barrack's always had a sense for where things are going early," says Steve Roth, a principal at Colony rival Secured Capital Corp. in Los Angeles.
In 1993, Barrack turned to investing in going concerns, leading the purchase of the Hyatt Regency Waikoloa, now the Hilton Waikoloa, for about $55 million, less than 15% of replacement value. Most of the money was put up by Taiwan's Koo family. Angelo Y.N. Koo says the family has already received an offer of more than $100 million, and he is advising the family to sell. But Barrack wants to hold Colony's Hawaiian properties for four to five years while the market recovers.
Going international poses fresh challenges, from managing currency risk to infiltrating local business elites. To break the ice with Europeans, Barrack often invites them to his villa in the south of France. Colony is bidding on French apartments, offices, and marinas but has yet to announce a deal. Barrack's strategy: "Go without ego and try to become part of the fabric." Although mum on details, he says he has engineered a way to structure the financing and ownership of assets with local partners that eliminates currency risk.
Among those hoping to see Colony II succeed are such well-heeled institutional investors as the California State Teachers Retirement Fund, which put in $150 million. The offering was oversubscribed by more than 2-to-1.
It remains to be seen whether Barrack can match his past performance. Is he deterred by the challenge? No way. "This is what we do for a living," Barrack says. "There's no life after Colony." Except, perhaps, when chasing one more goal atop a polo pony.