2010AWARDS & AnnuAL REVIEW - PERE

seas real estate and had been largely choosing non-listed vehicles
to do it through. When it came to real estate in their own backyard,
though, the same pension managers were thinking about
going direct or through joint ventures over the next few years.
In contrast, some large continental European investors in
unlisted property funds were retrenching, rather than pursuing
pan-European fund investments. Having suffered as a result of
diversification, lack of control and poor performance, investors
such as the Italian insurance company Generali were scaling
back on commitments to the unlisted sector.
Sovereign wealth funds – a real presence in European unlisted
funds – also were said to be looking to buy property more
directly and in club structures with like-minded investors.
All of this is before one looked at another investor sub-set
such as the high- and ultra-high-net-worth individuals. This
type of investor, also at MIPIM, is a fast moving and more fickle
animal than pension funds and insurance companies, not being
hampered with having to meet liabilities.
Against this backdrop, there was a vast number of different
GPs from different parts of the globe all wanting to attract equity
commitments from investors. No wonder the delegates and
residents of Cannes were strange bedfellows.
A matter of trust and expenses
Management fees were a hot topic in europe
just as they were in the us and elsewhere
Every now and again, an elite club of European private equity
real estate fund managers meets informally in central London
to chew the fat. What is discussed behind closed doors reflects
the big issues of the day, and one item that certainly was on
the agenda in 2010 was just how much GPs should push back
against LPs on the issue of fees.
It was a crucial topic because, as stated in a report by INREV,
the management of management fees and terms suggested
many investors increasingly were in favour of upending the traditional
fee structure in European funds. Specifically, LPs wanted
change on both the management fee and performance fee.
There are many aspects of a private equity real estate fund’s
fee structure to consider. But on management fees specifically,
the problem investors identified was in the way they had lurched
away from being a way to pay overheads towards becoming a
profit centre in their own right.
That is rightly to be stamped upon. However, there is a danger
in shifting too far on the issue.
The case against low-balling the management fee is that, in
certain circumstances, putting a premium on how low you can
go on the management fee might persuade some managers to
cut corners in managing optimally. Indeed, this might be the
case if the investors come to expect a report on total expense
ratio from funds. INREV’s study says total expense ratio currently
is reported to investors by just 26 percent of funds that
replied to INREV.
The concept of working out and relaying how much money is
not being spent on investment has its benefits in terms of being
a worthwhile measure. But the total expense ratio doesn’t tell
an investor everything it needs to know about the value of the
management fee spend.
The issue comes down to trust. LPs need to trust that a manager
is not looking to make money out of a management fee,
rather that it wants to spend for the greater good of the investor
base. The trouble is that the bond of trust has been broken
thanks to the mistakes made by many during the downturn.
Spotlight on spin-outs
A study suggested 43 percent of private equity
GPs thought incentives were never greater to
spin out, but in reality it was not that easy
It is hard to gather cold hard facts, as opposed to anecdotal evidence,
about how many GPs are contemplating spinning out. For
example, one cannot look up an index to get the number in order
to gauge its prevalence. So a study by accounting firm Grant
Thornton certainly was welcome because at least it threw a spotlight
on the thinking among UK GPs in mainstream private equity,
which in turn is a rough guide for its cousins in real estate.
In its UK private equity second quarter index, Grant Thornton
put the following statement to GPs: “Incentives have never
been greater for executives to leave their firms and set up a new
fund.” On one level, the results were inconclusive: fifty-seven
percent of GPs disagreed with the statement, while 43 percent
agreed. Nevertheless, four out of 10 GPs did agree, and that’s
quite a lot. It makes one wonder if we are not going to see a lot of
spinouts in the next couple of years.
Just as in mainstream private equity, plenty of real estate
funds have been caught out in terms of spending capital at the
height of the market. The issue they face now is how they can
work through those assets and reward themselves and their
staff.
Adam Turner, head of executive search firm Odgers Berndston’s
private equity practice in London, told PERE’s sister
magazine Private Equity International that he was working on
two mandates involving teams spinning out and setting up
first-time funds. “A number of guys within the general partnerships
are starting to look at each other and ask, ‘Am I going
to have to work twice as hard, for twice as long to earn half as
much money?’”
Clearly, there are forces at work that can precipitate spinning
out. In the case of DLJ Real Estate Capital Partners, some
sources said it’s because parent company Credit Suisse seemed
to want to exit the arena. Lehman Brothers also was a severe
case of needing to do something with its platform.
Of course, there are plenty of other factors that make such a
thing tricky and time consuming. Issues pertaining to the GP
and LP stake, third-party investors, lenders and joint venture
partners can complicate transactions. Indeed, making a decision
about one’s future is hard at the best of times, but it is especially
difficult today.
2010 AwArds & AnnuAl review | PERE 43