2010AWARDS & AnnuAL REVIEW - PERE

As one real estate deal professional argued to PERE, for many
of the larger institutional investors, registration – in essence, the
SEC’s seal of approval – will be an absolute must. “This is a game
changer in terms of how a firm markets itself,” he said.
Recap impasse
By backing a recapitalisation plan for
stockbridge real estate’s $1bn Fund ii, were its
lPs helping kick-start a turnaround or postponing
inherent problems?
Many GPs spent much of the past two years facing several unpleasant
truths about their portfolios, mainly that they paid
too much and employed too much leverage. In 2010, in order
to salvage some value from their funds and deals – and with it
their reputations – many fund managers asked LPs to dig a little
deeper in their pockets to allow for a recapitalisation.
In being asked to put up rescue capital, however, LPs faced a
dilemma. Aside from questioning whether the fund or deal is
worth recapitalising in the first place, are LPs rewarding GP failure
by investing additional cash or just being pragmatic about
trying to recoup some equity from a troubled situation?
Los Angeles Fire and Police Pensions (LAFPP) faced that
situation in the summer of 2010 as an investor in the $1 billion
Stockbridge Real Estate Partners II fund. After several recapitalisation
plans were rejected by LPs, San Francisco-based
Stockbridge succeeded in proposing a new, final plan to LPs
that addressed investors’ concerns regarding debt load, priority
payments and management fees. Under the plan, LAFPP might
see a potential return on its original and recap commitment of
between 31 cents and 69 cents on the dollar.
The caveat in all this, of course, is the word “might”.
On-demand LPs
A growing trend among us public pensions to
broadcast board and investment committee
meetings was an opportunity for GPs to win new
lP relationships
On 2 December 2009, Wes
Edens, co-founder of Fortress
Investment Group, walked
into the Oregon Investment
Council for a candid conversation
about the performance
of his funds. Like most private
equity and real estate
Edens: publicity via Oregon funds, Fortress’ performance
was taking a hit. Indeed, the
firm’s $5 billion Fortress Investment Fund V, closed in 2007, was
projecting a 0.44x multiple at the time.
So when Nori Gerardo Lietz, chief strategist for private real
estate at Partners Group and Oregon’s consultant, challenged
Edens over whether Fortress could ever return the pension’s
investment “100 cents on the dollar”, Edens admitted that for
Fund V “it’s not likely you’ll make two times your money.”
What was surprising is that such private conversations between
LP, GP and consultants increasingly are making it into the public
eye, as US public pensions raise the level of transparency into
their operations – and investments.
The conversation between Gerardo Lietz and Edens was part
of the pension plan’s normal policy of disclosure, but Oregon
was not alone in opening its doors to greater public scrutiny. In
July, the $94 billion Teachers’ Retirement System of Texas also
started webcasting its full board meetings, although not its investment
management committee sessions.
While many real estate GPs would balk at such openness,
those worth their salt should see the increasingly open nature
of their business as an opportunity to set themselves apart
from the rest of the crowd, rather than an assault on a private
industry. By being one of those fund managers that openly and
honestly communicates with its LPs – and is publicly seen to be
doing so – a GP can boost his or her reputational standing with
a vast gamut of investors at the click of a button.
Public market envy
Private real estate funds considered taking their
portfolios public as they faced sunken values
and a moribund fundraising market. would the
public market’s attraction prove short-lived?
In late January, Michael Fascitelli, chief executive officer of Vornado
Realty Trust, underscored one of the predicaments facing
private equity real estate funds today given the tough fundraising
environment. In reportedly trying to raise $1 billion for its
debut private equity real estate vehicle, Vornado Capital Partners,
he told a New York real estate conference that it would take
him no more than two days to raise the same amount in the
public markets.
The same certainly cannot be said of the private real estate
markets, with 2010 fundraising levels sinking below even the
trough experienced in 2009. Such a fundraising disconnect was
prompting some private real estate fund managers to eye the
public markets with envy.
Howard Roth, global head of real estate at Ernst & Young,
said several private equity real estate firms were looking to “roll
up” assets from one or a number of funds into publicly-traded
REITs. “It’s definitely an idea that’s percolating,” he said. Indeed,
in the February 2011 issue of PERE, RLJ Development was
said to be exploring such an idea for its Urban Lodging Fund II
and Fund III.
However, aggregating fund assets into a REIT IPO is no easy
matter and, for all its faults, the private fund model remained a
compelling investment model in 2010. For those GPs in search
of answers to portfolio problems, it may well pay better not to
covet their public cousins too much.
2010 AwArds & AnnuAl review | PERE 33