End of the line

REIT manager Cohen & Steers and its private equity real estate team were an unlikely pairing from the get-go. But various factors made it impossible for them to stay together.

Today, the five-year marriage between investment manager Cohen & Steers and its global real estate multi-manager team officially comes to an end. The two appear to have been mismatched from the start.

Cohen & Steers first came together with the former Citigroup Property Investors (CPI) global real estate fund of funds team in 2008. As CPI’s parent company took a beating in the global financial crisis, the team was looking for a new home, and saw the advantages of Cohen & Steers’ large client base. Meanwhile, Cohen & Steers, a publicly traded company, was seeking to grow its assets under management and diversify its business by expanding into new strategies.

Since then, Cohen & Steers has indeed been successful in growing AUM, from approximately $24 billion in 2008 to nearly double that as of June 30, according to its second-quarter earnings results. But after five years, the private equity real estate business was said to be contributing only about $100 million to the company’s total AUM. PERE understands that the company, which did not respond to a request for comment, had been aiming to build the unit to more than $1 billion of assets.

The problem had a lot to do with fundraising. Cohen & Steers’ debut real estate fund of funds, Cohen & Steers Global Realty Partners III, raised $101 million during its initial closing in October 2011, according to a filing with the US Securities and Exchange Commission. But after that the fund, which was targeting $200 million in commitments, largely failed to attract additional capital.

In retrospect, fundraising challenges for the vehicle weren’t much of a surprise. Cohen & Steers, after all, made a name for itself managing real estate investment trusts and other public securities. Venturing into private equity real estate inherently represented a conflict of interest for a firm that has built its business on challenging the private markets. A June 2013 white paper published in-house that touted “the outperformance of listed real estate, compared with nearly all categories of private real estate funds” wasn’t going to do any favors for the company’s sole private market product.

The other wrinkle to the situation was that the product in question was a real estate fund of funds, a type of investment vehicle that more widely has struggled to attract investor capital, in part because of its double-promote structure. PERE understands that the Cohen & Steers vehicle diverged from traditional funds of funds in that half of its capital was deployed in co-investments and direct joint ventures – the way the sector is currently heading – while the remainder was invested in operator-driven funds targeting distressed assets.

The company’s in-house marketing team, however, was said to have promoted the offering as a traditional fund of funds. It’s not unreasonable to assume that a marketing staff that focused nearly all of its time on public market products may not have been best placed to promote a private real estate product.

Interestingly, this wasn’t the first time that Cohen & Steers tried its hand at private equity real estate. In 1999, the company hired Jeffrey Kaplan and Michael Barr from Westbrook Partners to launch a closed-end fund that would make private equity investments in a wide range of property companies, portfolios and assets.

The failure of that first union should have been a red flag for all involved when Cohen & Steers decided to re-enter the space five years ago. One could say that the company’s relationship with private equity real estate ultimately has been more of an uncomfortable flirtation than a serious commitment. At the end of the day, its heart was elsewhere.