Do it yourself

One of my favorite bits of jargon in the financial world is “disintermediation”. Not only does it make its deliverer sound smart, it also tends to be used when someone is claiming to enjoy an advantage that runs exactly counter to the prevailing trends.

Markets tend to get more, not less, efficient. As news of a good opportunity spreads, parties try to get between buyer and seller, spoil the arbitrage and capture a piece of the action in the process. This is intermediation, and it's a word you hear often in the private equity market, where the term “proprietary deal” is going the way of the unicorn.

But in the private equity real estate market, there would appear to be a major arbitrage opportunity, a chance for disintermediation as it were, in the form of the relationship between large funds and their local operating partners. Just as deal-bydeal guys in the buyout world gradually woke up to the benefits of a limited partnership approach, on-the-ground operating partners are now asking, hey, why are we working as hired guns when we ourselves can raise a limited partnership?

The appeal of OPs as GPs is not lost on institutional investors, who are cognizant of the added layer of fees that operating partners mean in a private equity real estate fund. The marketing pitch, then, is something like: “If you liked the work we did on that Dallas shopping mall for Fund X, you'll love our new Shopping Mall Transformation Partners fund.”

Behind this logical veneer lies the reality of the fund management business. An operating partner who knows, for example, how to manage a boutique hotel may not know the first thing about quarterly reporting, risk management or Wall Street. In this, the September issue of Private Equity Real Estate, Aaron Lovell explores the phenomenon of operating partners going the private equity fund route. He finds enthusiasm for the trend among operating partners, and cautious enthusiasm from everyone else.

This month, you'll also find the first of what will be an occasional feature from us – a roundtable discussion with seasoned real estate investors. Last month in New York, Paul Fruchbom led a discussion with a collection of scary-smart GPs on the risks and opportunities in the US commercial real estate market.

Enjoy the issue,

David Snowdavid.s@us.investoraccess.com