Real Estate: Nomura's Penner Has A New Launching Pad

Ethan Penner vows his new lender will rival giant GE Capital

Ethan Penner, the commercial real estate kingpin, is finally getting an amicable divorce from his employer, Nomura Securities Co. After establishing Nomura as one of the largest lenders in the industry, Penner now wants to amass an even larger empire on his own.

Penner has made a name for himself by helping to create the commercial mortgage-backed securities market, which is expected to reach $75 billion this year. In 1993, Penner teamed up with Nomura to lend to the commercial real estate industry at a time when banks and insurers were on the sidelines. He also was the first to pool developers' loans into large bond offerings. Nomura wants Penner's business to keep growing, but didn't want to increase its capital exposure to the business.

On June 29, subject to board approval, Nomura is expected to set up The Capital Co. of America LLC, which will be capitalized at $500 million. Some $3 billion in assets from Nomura Asset Capital Corp., Penner's operation at Nomura, will be transferred to the new company. Initially, Capital America will be 100% owned by Nomura. But within six months, Capital America Chief Executive Penner, Chairman Michael A. Berman, and the company's employees are expected to be awarded about 15% of the firm in lieu of their bonuses. Penner is also raising private equity to bring in other investors. Ultimately, Nomura's stake could drop to about 25%.

HANGING LOOSE. With greater autonomy, Penner plans to open offices worldwide to expand into global commercial real estate lending and commercial mortgage-backed securities. He also sees big opportunities in developing countries for asset-backed securities based on credit-card debt, auto loans, and home mortgages. In fact, Penner has set his sights on becoming a diversified finance company as large as GE Capital, the diversified financial arm of General Electric Co. "Every Coke needs a Pepsi. Maybe we'll be their Pepsi, or they'll be our Pepsi," he says. "There's no reason we can't grow five- or tenfold."

This kind of outrageously overoptimistic statement is Penner's stock in trade. Of course, he is a pipsqueak compared to GE Capital, with its 67,000 employees and $3.3 billion in earnings in 1997. Penner's Nomura unit has 400 employees and made $200 million in 1997.

That hasn't stopped Penner from boasting that his company is more creative than GE Capital. It's true Penner's let-it-all-hang-loose style couldn't be more different than GE Capital's. He has generated a buzz in the real estate world by hiring Elton John, Bob Dylan, and the Eagles to play at his annual real estate conferences. And Penner has the easy confidence that comes from being one of Wall Street's best-paid people, thanks to a shrewd profit-sharing deal he cut with Nomura. In the year ended in March, 1998, he got a $25 million bonus, down from $47 million in '97.

And this natural showman has made ambitious pronouncements before that haven't panned out. In September, he held an event at the House of Blues in Los Angeles and even belted out a karaoke version of Steppenwolf's Born To Be Wild while CNN cameras rolled. The event publicized his intent to make $1 billion in loans within the year to musicians, then package and resell them as asset-backed securities. Nine months later, Penner has made only one $15.4 million loan, to Rod Stewart, and is singing a more downbeat tune. The entertainment-securitization business is "a nonstarter," he says now.

CROWDED FIELD. Penner has also been the subject of controversy in his main real estate business. Some investors and rivals are fuming about the unusual terms and lack of disclosure of those terms in a recent Nomura $3.7 billion commercial mortgage-backed securities deal. After complaints surfaced, Nomura was forced to provide more disclosure. Nomura says credit agencies did not change their ratings as a result.

And Penner faces much tougher competition than he did when he started. Other Wall Street players, such as Lehman Brothers Inc. and Credit Suisse First Boston, are now neck and neck with Penner in real estate lending and issuance of commercial mortgage-backed securities. These firms already have a global presence. And without cheap funding from his foreign parent, "his capital is no longer limitless," says one competitor.

So far, GE Capital has nothing to worry about. But if Penner achieves even some of his ambitious goals, this brash entrepreneur may bring his brand of rock-and-roll finance to the world.

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