It is a question we at McKinsey often get asked by real estate investment managers: should we be aiming to serve smaller investors or just be focusing on the big, strategic investors?
The question is entirely valid. It cuts to the very heart of a manager’s strategy. Investment needs, at each end of the spectrum, differ substantially, as do capital deployment mechanisms, decision-making processes, and client servicing requirements.
Large investors often seek out strategic partners with which they can put hundreds of millions of dollars – if not more – to work in joint ventures, separate accounts, and fund vehicles. These investors require individual attention from the top of the house to understand their needs and surface the right opportunities.
Smaller investors, on the other hand, seek diversified market access through commingled vehicles, often relying on consulting gatekeepers to support their decision-making. Serving this end of the spectrum – particularly high net worth and retail capital – requires a robust sales and marketing function and a scalable investor relations team.
From the manager’s perspective, setting out to court each and every investor type can be a dizzying experience, given the kaleidoscope of needs and preferences. It is reasonable to think that one should strive to keep things simple and either aim big or small. Good strategy often is about deciding which customers to serve, and which not to serve.
So, big anchor partners or small investors? The right answer is, you guessed it: both. Like any savvy investor which builds a portfolio of uncorrelated investments, a carefully curated but diversified portfolio of investors is the key to sustainable growth of any real estate investment management franchise.
Large investors can be partners in innovation, deploying patient capital to new markets and non-traditional opportunities in one-off transactions, outside the mandate of flagship vehicles. In return, these investors are seeking out strategic relationships with managers which can deliver not just proprietary opportunities, but proprietary insights.
Anchor partners are necessary for any growing franchise, but they are rarely sufficient. Investing consistently behind transformative themes – for instance, e-commerce, demographic shifts, the future of retail, the growth of data – requires a scale of capital beyond the ability of a few large anchor partners. And commingled vehicles offer the power of aggregation.
Anchor partners are necessary for any growing franchise, but they are rarely sufficient.
A longer tail of small investors, then, fits the bill. Most are looking for differentiated, but proven, investment performance. Many find comfort in being in the company of larger, brand name anchor investors. These smaller investors may not seed new strategies, but they can be a loyal customer base, assuming consistent investment performance and client service, of course.
Smaller investors can also be an important source of new growth, from both the smaller institutions and retail. The high net worth channel, for example, is a significant opportunity: we estimate that, in the US, these investors’ unmet need for private real estate could be as high has $100 billion, although unlocking this demand will require innovation in product vehicles and access points.
Efficiently serving the ‘the long tail’ requires a highly efficient fundraising infrastructure, engineered for scalability. This includes investment products matched with liquidity and risk-return needs, partnerships with intermediaries – ranging from wealth managers to the consultant community – and a set of digital capabilities that create scale, lower costs, and improve the client experience.
Getting the balance right between big and small investors is not easy. Attracting a broad range of investors can be challenging, requiring a clear sense of segmentation rooted in a good understanding of what investors truly need. Only then can managers develop an appropriate investment proposition and service level to match.
So the answer is both, and many in between. There are real advantages to treating investor relations as a proactive exercise in portfolio construction governed by concepts like risk, return, diversification and strategic asset allocation. Choosing who you want to serve at its core is an exercise in strategy. And the benefits of doing this well – long term partnerships, aligned investors, and a stable pool of capital – can clearly be far-reaching.