Feature: How FoFs are avoiding the J-curve

The fund of funds landscape is changing, argues CB Richard Ellis Investors’ Jeremy Plummer, with blind pools increasingly becoming a thing of the past. Facing a J-curve is something the sector's investors are keen to avoid, he says.

Whether blind pool fund investing has become outmoded or its shunning is simply symptomatic of a couple of disastrous vintages is a topic that continues to invite discussion.

One group, however, that seems to be accepting that the blind pool days are over is fund of funds managers. In a recent round of interviews with multi-manager platforms ahead of a feature on the sector published in this month’s PERE, one common thread was a perceived need for pre-identified investments as a precursor to successful fundraising.

Speak to Jeremy Plummer, head of global multi manager at Los Angeles-based CB Richard Ellis Investors, and he’ll tell you the fund of funds landscape is changing. These days, more and more investors are keen to see underlying fund investments before they part with their capital.

“Before the crisis, funds of funds offered a J-curve to investors and the fees on committed capital that were charged could lead to poor returns,” Plummer told PERE. “The old model of investors committing to blind pools with such fees isn’t happening anymore. Instead, they are looking for pre-defined portfolios.”

Plummer may well be vindicated. After all, CBRE Investors recently closed on $269 million from 10 European institutional investors for its Asia Alpha Fund (AAF), a fund of funds that initially aimed for $200 million.

Before the crisis, funds of funds offered a J-curve to investors and the fees on committed capital that were charged could lead to poor returns

Jeremy Plummer, CBRE Investors

You could say the firm has been J-fighting. Just a couple of months on from its final closing, AAF is already 80 percent committed. Many of those commitments were made to existing funds prior to final closing.

“Whether it was to a fund needing additional equity or through secondary trading or the fund had a substantial portfolio already, in each case we could see what we were buying and that meant no J-curve.” Plummer wouldn’t comment on returns, but PERE has since learned the fund returned a 16 percent IRR in its first year.

Of course, investing in funds – or club deals – with pre-specified portfolios presents a new challenge: it requires fund of funds managers to underwrite not just the manager but the underlying real estate. As Plummer says, “for this type of investing it is essential to have real estate people on the ground who can properly assess the property assets. Fund of funds managers who arrive on a plane and have no local property capabilities are shooting in the dark.”

Plummer’s sentiments are felt elsewhere. As Bo Jensen, managing partner at Copenhagen’s Sparinvest, put it, the “happy days” when seeded portfolios or pre-identified investments weren’t a commitment prerequisite for investors are gone.  “It’s far more natural for investors to see what they’re buying now and that makes sense,” he says. Jensen also has been successful in attracting capital, €110m to be precise, to his firm’s latest global vehicle, Sparinvest Property Fund II.

Some fund of funds won’t close the door on blind investing completely. As Glenn Uren, managing director at Franklin Templeton, says: “If there’s the opportunity to invest with a great manager with a blind pool, are we going to turn away? No, we’re not. Commitments must be made on a case-by-case basis.” But even Uren admits his firm primarily seeks to invest in pre-specified assets “so we can touch and feel what’s on the ground”.

Of course, not every fund of funds manager can locate enough underlying funds with visible portfolios/pipelines in tow. So what should they do?

How about investing in the public markets, as they’ve done at Schroder Property Investment Management? Rob Bingen, the firm’s co-global head of multi manager, says its European funds of funds have made a couple of investments in EPRA-indexed companies alongside more traditional investments.

That’s another story which you can read more about in this month’s issue of PERE, out now.