EDITOR'S LETTER: The dismal dribble

There is an iron rule of public relations during a crisis, which is that one must reveal bad news in its entirety and all at once.

Failure to use this strategy can mean the difference between, if you will, Hugh Grant and Bill Clinton. After the actor found himself in an embarrassing, personal situation, he immediately went on television to call himself a fool and apologise.

The story was huge for a few days, providing great material for comedians, and then quickly disappeared. When the former US President found himself in a somewhat similar personal imbroglio, he made all the wrong PR moves. He hedged, he played word games, he denied, he wagged his finger. The Monica Lewinsky story was headline news for months on end because the story dribbled out tantalising new details on a daily basis.

Easier said than done, but the Clinton White House would have been far less damaged had the President issued a mea culpa in the style of Hugh Grant.

What does this have to do with real estate? Let's talk about valuations and the ill-advised tendency of many GPs to dribble out bad news, as opposed to kerplunking it on their investors all at once. As we report on p. 20, general partners on average wrote down their portfolios by some 25 percent in the fourth quarter of 2008. That's bad news, but sadly it's not all the bad news. Fair value requires investment managers to disclose what their assets would sell for if unloaded today. Investors are sceptical that a 25 percent haircut tells the most accurate story about the state of the market. They expect further write-downs going forward.

Why the hesitancy to write down? In this market, a GP could admit almost anything and be forgiven. But the slow, pernicious dribble of bad news will be long remembered by LPs, especially when the next fundraising documents get circulated (or if).

Let's pause now and recognise how depressing it is that many LPs don't find a 25 percent one-quarter write down to be adequate. The entire house of cards that got built on top of real estate was based on the assumption that catastrophic events like a 25 percent write-down simply couldn't happen. Well, it has, and now professional investors must take in the stark reality and try to make hay in a different kind of sunshine.

To that end, I'm sure you'll enjoy Jonathan Brasse's insights into John Grayken (p. 22), the brilliant and reserved founder of Lone Star, which seems more than any firm in the world primed to profit from the doom and gloom that surrounds us.

Enjoy the issue,

David Snow
David.s@peimedia.com