COMMENT: Fallout shelter

Of the many in the private equity real estate industry who have struggled over the past several years, perhaps no group has been more hard-hit than placement agents. And, as the saying goes, when the going gets tough, the tough get going.

Industry moves over the past two months alone point to how challenging it still is for real estate placement firms. Earlier this week, PERE reported that Chuck Purse was retiring from Park Hill Real Estate and leaving the placement business. Meanwhile, he is in talks to join one of the firm’s clients and could take on a new role in the relatively near future.

It’s hard to ignore the implications of this news. Of course, there have been other exits from the real estate placement business. In January, Josh Overbay, a director in Lazard’s private funds advisory group, left the firm to join Almanac Realty Investors, where he now serves as its head of capital raising and investor relations. Also that same month, PERE reported that M3 Capital Partners had downsized its advisory business in favor of focusing on its investment platform, leading to the exodus of up to five senior staff.

Purse’s planned departure, however, is an even bigger blow to the business. After all, he is arguably the best-known real estate placement agent in the industry, representing one of the top placement firms. He is a prime example of how capital advisors can be successful even in the toughest of times. And while we don’t claim to know the exact reasons why he is leaving Park Hill, few placement agents would deny how much of an uphill battle they face. In fact, some who have left to become in-house capital raisers have told PERE that the challenges of the placement business were a major factor in their decision.

While the outlook for private equity real estate fundraising and investments has been steadily improving, the industry still is a far cry from where it was in the boom years prior to the global financial crisis. Even as many global institutions have increased their allocations to real estate –including commingled vehicles – the competition among funds for investors’ dollars remains fierce. While fundraising volumes have picked up in the past couple of years, much of that money still is concentrated in the hands of a few.

Capital advisors face challenges particular to their profession as well, most significantly the placement agent ban by many US public pension plans following a number of pay-to-play scandals involving such institutions in recent years. By forbidding the use of placement agents in connection with a pension plan’s investments, such a ban has without a doubt impeded the ability of capital advisors to do their jobs. For some professionals, exiting the business and going in-house at a fund manager may be a way to be freed of those encumbrances and more fully utilize their skills and contacts.

Make no mistake: there always will be a need for placement agents because, even in a healthy fundraising market, not every firm has the capacity to hire a dedicated in-house capital raiser or the ability to reach out to as wide an investor universe on their own. However, the recent departures may be the fallout from a business that has changed considerably over the past several years.  With those changes unlikely to go away anytime soon, expect the fallout to continue – and little to shelter the industry from it.