20% returns ‘unrealistic’ in low interest rate era

David Gilbert, the new CIO of ING Clarion Partners, has questioned the traditional opportunistic fund target of 20% arguing in a low interest rate environment mid-teen returns should be acceptable.

Real estate fund managers and investors have been urged to lower their return expectations for opportunity vehicles amid warnings the traditional 20 percent target was “unrealistic” in today’s low interest rate environment.
David Gilbert, speaking to PERE for the first time since his promotion to chief investment officer of ING Clarion Partners, said the 20 percent nominal absolute return target was simply a byproduct of the 1990s when the opportunity fund model was born and when interest rates were in the high single digits.

[20% returns are] a legacy of the past and a function of either being unrealistic or accepting a pretty high risk profile.

David Gilbert, chief investment officer, ING Clarion Partners

However, with today’s historically low interest rates, Gilbert said an appropriate risk-adjusted premium over Treasuries suggested returns in the 13 percent to 15 percent range were more adequate.
“The question in relation to the opportunity funds is what is the right opportunistic return?” he said. “In trying to pursue 20 percent net returns the industry clearly suffers from some excess.”
Gilbert, who joined ING ClarionING in 2007 and was promoted to CIO last month following the departure of Jeffrey Barclay, said investors were now “extremely cognisant of risk management” and by targeting 20 percent returns opportunity funds could be adopting higher risk profiles than necessary.
“It’s a legacy of the past and a function of either being unrealistic or accepting a pretty high risk profile,” said the former managing partner at JP Morgan Partners, who later joined JP Morgan’s investment management arm,’s private equity real estate arm, JP Morgan Partners. He said with credit no longer as freely available as during the boom, managers could employ leverage as a way of fuelling returns, adding: “Investors don’t want to double down on that bet again.”
To read more of the interview with David Gilbert, see the December issue of PERE magazine.