Counting on advice

Late last year, pan-Asia logistics specialist e-Shang Redwood added another distinguished member to its then four-member advisory board, appointing Heizo Takenaka, a former government minister considered one of the scions of progressive economics in Japan. Takenaka was made minister of economic and fiscal policy under Prime Minister Junichiro Koizumi’s administration in 2001 and spearheaded Japan’s economic structural reforms for over five years before returning to academia.

ESR’s senior management has known Takenaka for over a decade. The firm counted on his “sage advice on the current economic and sociological situation in Japan” and his perspective on global macro events, from the global financial crises to the deadly 2011 Japan tsunami, says Charles de Portes, ESR’s co-founder and president. With Takenaka now formally joining the board, ESR’s team can meet with him more frequently – usually on a quarterly basis – instead of on an ad-hoc basis.

ESR’s high-profile hire has brought into spotlight the ubiquitous yet rarely discussed running of advisory boards. The scope and nature of these functions varies per organization but their general purpose is straightforward: to impart advice on business matters and help a firm expand its network. The advice is often non-binding and requires usually only nominal compensation. Some question their ultimate relevance. “Many times, it is easy for people working in real estate to get lost in the forest, forgetting to see the bigger picture,” explains de Portes. “The advisory board members are our sounding board and give us a sanity check. They make sure the firm does not focus only on deal-by-deal returns, but also see what is appropriate for the company’s brand and image, as well as what makes sense in the context of demographics and global economics.”

ESR’s board comprises executives from diverse backgrounds, ranging from politics, international economics and alternative investments. The executive most connected to the real estate private equity world is Brent Elkins, currently managing director at Boston-based real estate investment firm Beacon Capital Partners. Elkins has been on ESR’s board for three years, but his relationship with the founders goes back a long way.

Having an advisory member from within the industry,  according to some industry observers, fosters a mutually beneficial two-way exchange of ideas and contacts, but it could also create potential conflict of interest issues.

“At my past firms, it would have been less appropriate to take on a formal advisory role because the businesses could arguably have overlapped. But I took on this role around the same time that I joined Beacon Capital, which  invests only in office property and only within the US, so there is no conflict or overlap with ESR,” says Elkins, who previously steered BlackRock’s opportunistic capital-raising efforts as managing director and served as vice-president for developing funds at Colony Capital.

Thanks to his background in capital raising, Elkins has introduced some institutional investors and other high-level industry relationships to ESR. He has helped the firm determine whether to create a fund or a segregated account for a specific strategy. Before e-Shang and Redwood’s merger in 2016, Redwood also shaped certain marketing messages, economic terms and governance provisions in their China and Japan real estate funds based in part on his feedback.

When asked what the role means for him personally, Elkins said it feeds his intellectual curiosity, enables him to assist ESR principals who have been industry associates and friends for many years, and keeps him plugged in and well-informed. He advises ESR on a more ad-hoc basis.

Another senior advisor appointment was made by the global real estate advisory firm Hodes Weill last October, when it brought on Howard Roth as a member. Roth, principal of consulting firm HSR Advisors, recently retired from Ernst & Young as leader of its global real estate, hospitality and construction practice, and is part of Hodes Weill’s eight-member advisory board, which meets biannually. At Hodes Weill, there is no contract or specific term for these members; they can stay on the board and leave at any time.

For a boutique firm like Hodes Weill, an advisory board gives it a more global and senior network in the industry, says Douglas Weill, the firm’s co-founder and managing partner.

Weill agrees that safeguarding from any conflict of interest matters is a key tenet of this arrangement.

“For the most part, everyone on our advisory board is not working full time at a firm. They are not necessarily retired, but more entrepreneurial,” he says. “One of our board members did pick full-time employment so we are careful to wall off anything that might be confidential, and he does the same. We do not review sensitive information with the board; it is more for corporate direction and strategic advice.”

Moreover, given their level of seniority, most of these members are content with providing macro advice instead of officially joining the firm’s management board and being part of its day-to-day business. “Being on a formal board would require them to face the legal consequences of their decisions, have liability as directors, and it would also require a level of scrutiny on a daily basis that these members do not have time for,” says ESR’s de Portes.

The compensation arrangement also differs case by case, depending on whether the advisory board has been set up in a formal or informal capacity. According to one Asia-based investment manager, these members are generally either appointed on a fixed retainer basis or their fee is linked to the quantum of their participation in the firm’s conference calls and other responsibilities.

Weill says he has seen cases where managers would provide some form of compensation to the advisors, though not as much as one would get sitting on the board of a public company. There are other examples, he adds, where the advisors also participate in the carry.

Skin in the game

The term ‘advisory board’ is not always used in the same context within the industry. At a time when many global private equity firms are going through succession planning, some are turning to outside experts to help with such organizational changes, Elkins says.

Sometimes, even operating partners are put in an advisory capacity, and other times firms appoint executives that consult on actual assets, according Nitin Jain, chief executive, global asset and wealth management at the Mumbai-headquartered financial services firm Edelweiss Group.

In March 2017, Edelweiss set up an advisory board for its distressed investing business through which it invests in real estate, infrastructure and other assets. The board comprises Sushil Kumar Roongta, former chairman of the Steel Authority of India, one of the largest state-owned steel making companies in the country, and Mahinder Singh Mehta, former chief executive officer of Reliance Infrastructure and Vedanta Resources. Jain says several executives in India, who were working in public sector units as chairmen and managing directors for almost three to four decades, have recently retired and are willing to take on part-time consulting assignments.

“An advisory board is at times used to create an impression in the market, alongside the association benefits of having senior people,” he says. “For us, we want people who can add value. For example, we have a former chairman of NTPC Limited as an advisor. No one knows a power asset better than him.”

Explaining the role of this board, Jain says the firm first calls for a meeting to generate ideas when it is considering a potential distressed asset deal, allowing advisors to give their feedback on the quality of the asset. They continue to provide advice once the asset has been acquired; some of them acting as consultants to help the management with managing costs and other technical issues.

“They play an important role in the entire lifecycle of an asset,” says Nitin.

In many other cases, investors in a particular fund also form part of an advisory committee. The Swedish private equity group EQT Partners, for instance, has four members in its Investment Advisory Committee, which meets on a quarterly as well as ad hoc basis. This is separate from the standard investors’ committee, which represents the fund investors and meets the fund manager and advisors semi-annually.

Rob Rackind, partner and head of EQT Real Estate, says it is part of EQT’s DNA that all these advisors invest into the fund alongside the team and other investors. This is done so that everyone’s interests are aligned.

When asked if this policy has a bearing on how independent these advisors can be in imparting advice, Rackind says: “These investment advisory committee members are independent in that their day-to-day job is not managing the fund. They are not involved in the detailing of every transaction. They are separate investors and their decision is not binding. Ultimately, the GP can make a decision that doesn’t follow the advice of the advisory board, if they so choose, but given the depth of experience they have they typically never get it wrong.”

Irrespective of the nature of an advisory board, these members are simply offering advice, which is why their relevance is sometimes questioned in the industry. Beacon Capital Partners’ Elkins says if the advisors demonstrate full engagement and candor, they are extremely relevant to a firm, especially when it is making some bold and consequential decisions like embarking on a new fund or entering a new market. The type of advisory board that is here to stay and will remain a fundamental part of the real estate world are ones tied to a fund and comprised of LPs, in his view.

Ultimately, it all comes down to trust. “Given their level of seniority, these advisory board members do not accept a position in cases where they don’t have a history with the company or an understanding of its business,” says de Portes. “There needs to be a certain level of unspoken trust that, if the company makes any major decisions, the management will at least brief the advisors.”

Firms and advisors alike have extolled the mutual benefit of forming light, non-committal forums for analysis, even if the degree to which these unions bear fruit is varied and debatable. As such, the practice is one area in the industry borrowing more from art than science.