AMERICAS NEWS: Time for recalibration

Regularly reviewing fund investment strategies could keep GP-LP relationships out of counselling. PERE March 2010 issue

Being an LP in a closed-ended commingled fund isn’t just about taking a passive position: limited partners should also proactively “recalibrate” relationships with their fund managers, especially when it comes to a vehicle’s investment strategy.

With most GP-LP relationships lasting between eight to 10 years, Ernest Hunt, senior investment officer, real estate for the $37.5 billion United Nations Joint Staff Pension Fund, has urged investors to fundamentally review a fund’s investment strategy every few years to ensure continued “calibration” of interests.

Speaking at the annual winter forum of the Association of Foreign Investors in Real Estate last month, Hunt said investing in private equity real estate funds was “less than marriage but more than dating”, requiring “from time to time … a recalibration [of] your relationship”.

“An investment strategy from two years ago and today are not necessarily going to be the same thing. Those vehicles have to be able to breathe and be flexible over that eight to 10-year life, especially in the investment period,” Hunt told delegates at the New York conference.

The UNJSPF invests in roughly 44 commingled property funds, with Hunt saying LPs had to develop relationships where LPs could encourage GPs to “start from scratch” if the investment strategy wasn’t suitable for market conditions. “You have got to have relationships where you can say if we need to rethink the investment strategy, we have to rethink the investment strategy.”

Hunt added: “If you are getting out of calibration with LPs, which can happen over a long period of time, it’s going to lead to problems. I’m a big believer in recalibrating that interest from time to time.”