EDITOR'S LETTER: Ghosts of performance future

PERE Magazine December 2008/January 2009 issue

The December/January issue of PERE brings both glad and bad tidings.

The good news is that investors in private equity real estate are now better equipped than ever to benchmark the performance of their general partners. The bad news is that much of the capital put to work in recent years is going to perform relatively poorly.

As Robin Marriott reports in this issue, the private equity real estate industry finally has a useful index that takes into account the unique characteristics of limited partnerships, IRRs and opportunistic strategies.

While the improved index will not be good news to underperforming GPs, it is good for the industry as a whole. Many institutions won't embrace what they can't measure, and this tool, from NCREIF and The Townsend Group, brings opportunity funds even further into the mainstream of institutional investment.

That said, as the years go by expect to see the 2005, 2006 and 2007 vintage years put blemishes on the overall track record of private equity real estate. As is the case with most long-term asset classes, vintage years directly before recessions tend to perform poorly, while vintage years during and directly after recessions tend to be great.

Given the depth of the current crisis, astute LPs are right to be eager about the 2009 and 2010 vintage years, even though the capital has yet to be deployed.

There will be plenty of pain to go around in the vintage years just passed, but certainly those who bought retail properties during this period are wincing and worrying. But as Eva Poon reports, there are many general partners still pursuing retail plays.

They are putting capital behind properties in the emerging markets, where consumer demand still far exceeds the supply of quality shopping malls. In the US, they are eyeing relatively recession-proof properties anchored by grocery stores. If the dismal holiday shopping has you down, remember that retail properties purchased in this environment will pay dividends in years hence. The Ghost of Christmas Future is an auspicious one, even if the Ghost of Christmas Present is frightening.

As we bring the current year to a close, also remember to vote for the most worthy individuals and firms in the prestigious 2008 Global PERE Awards. You can get started by visiting PrivateEquityRealEstate.com.

The PERE edit team looks forward to providing you the most impactful, interesting news on this exciting industry in 2009 and beyond.

Enjoy the issue,

David Snow