EDITOR'S LETTER: Transparent destiny

PERE Magazine, April 2009 issue

We asked participants at MIPIM and at our PERE Forum in Hong Kong how they saw the future of the real estate industry. Their responses are in this issue of PERE magazine. Among the recurring themes was this: Private equity real estate is about to get much more transparent than most of its veteran practitioners ever thought possible (or desirable).

From one end come the LPs, demanding to know as much as possible about the assets that reside in all those opportunity funds they backed. From the other end come the politicians, all trying to outdo each other in their demands that secretive money-bags guys reveal their operations, their risks, their holdings and their investors.

If you're a GP, this means that on top of all the heavy duty asset management you're probably doing right now, you need to make sure your firm has the systems and personnel necessary to cope with both a higher level of investor relations and – eventually – a much more extensive compliance regime.

According to INREV, there were €1.1 billion in European secondaries market trades last year. This isn't much compared to the private equity market, but it's a significant number for private real estate funds, and it's only going up. If you are a GP of a certain size, you probably have at least one LP thinking, “How do I lighten up on these ongoing capital commitments?”

One solution is through the secondaries market. These transactions require the sharing of details with external bidders that many GPs are loathe to provide. But in the name of good investor relations, and to ensure against an artificially low bid, GPs are going to have to open up the proverbial kimono and get with the times.

And if liquidity-minded LPs don't spur coy GPs to action, the regulators will. On Capitol Hill sits a new bill that would remove many of the safe harbours for a fund management company not registering with the SEC. If passed in its current form, the managers of private real estate funds, private equity funds, venture capital funds, oil and gas funds and hedge funds would face life as registered investment advisors and all the inspections and other forms of compliance that involves.

With added franchise management costs, and with more demanding LPs, only the truly talented thrive. It's a Darwinian step change that has been long predicted. PERE will be there to report on and help make sense of the added transparency and heightened competition.

Enjoy the issue,

David Snow