Friday Letter Holiday wishes and caviar dreams

With year-end upon us, we examine some of the trends that have emerged this year and are likely to dominate 2011. 

As 2010 draws to a close, it is natural time to reflect on the accomplishments of the past year. It also is a good time to look ahead to the potential of the upcoming new one.

Therefore, for PERE’s last Friday Letter of 2010, it seems fitting to examine some of the trends that have emerged this year in the realm of private equity real estate and that are likely to play a significant role in shaping 2011.

For many GPs, 2010 wasn’t much better than 2009, particularly for those trying to hold on to the old business model. As the industry struggled to get up off the bottom, fundraising remained weak, prompting the more savvy players to take what they were given and offer smaller, more targeted funds. And with RTC-like fire sales failing to materialise, GPs began to rein in return expectations. Both trends are likely to gain momentum next year.

Consolidation and contraction of private equity real estate players also is likely to gain some steam next year. This year witnessed the resolution of several distressed situations, such as Citi Property Investors and Bank of America Merrill Lynch’s Asia platform, and some of those firms still teetering on the brink may see their fates determined next year. But not all the consolidation next year will be controversial, as the auction of ING REIM augers.

For LPs, 2010 was a year to re-evaluate the way they invest in private real estate. Astutely gauging the temperature of the market, many large LPs saw this year as the year to reduce risk and get back to basics, which meant a return to core properties. Indeed, trophy assets in top markets around the globe were fought over and bid up to frothy levels in the name of reduced risk, all the while negating a portion of the very benefit they were trying to achieve.

All this focus on core is leading to an inflection point in 2011, when the more adventurous LPs will begin to step away from core in an effort to achieve better returns. Indeed, there are initial indications as the year draws to a close that LPs are starting to explore this possibility.

Not only were LPs re-evaluating the way they invest in real estate, they also were re-evaluating the relationships they have as a result. One trend that emerged this year is LPs investing through co-investment and club deals rather than funds, and the other is working with operators as opposed to pure allocators. Both developments are at least partly in response to the rise of mammoth global fundraisers prior to the credit crunch, and both are likely to continue for the foreseeable future as LPs seek more control over their investments and more basic real estate expertise from those they work with.

Lastly, in a development that foreshadows the LP mindset for 2011, CalPERS is evaluating a slew of recommendations delivered this week as a result of a special review following last year’s placement fees scandal. Among the more controversial are banning the use of consultants that also serve as money managers to the pension fund, insisting that nearly all fees paid to managers be incentive-based and prohibiting the payment of placement fees from the assets of the partnership or funds in which it invests.

Whether these recommendations are implemented remains to be seen, but one thing is for certain: if CalPERS implements them, others will follow. That would definitely change the relationship between LPs and GPs, not just next year but for years to come.

So, as you look back on 2010, take a minute to think about the LPs, GPs, service providers and transactions that stood out this year. Then go to and submit your nominations for the 2010 Global PERE Awards. This weekend is your last chance to have your say on who will be in the running, so what are you waiting for? Submit your nominations now.