Friday Letter If at first you don't succeed

If at first you don’t succeed, try, try again. The proverb was originally a maxim used to encourage American schoolchildren to keep doing their homework. It could easily apply to certain general partners in private equity real estate today.

A glance at PERE’s back of book Capital Watch section reveals that this year funds in market were seeking $98.36 billion while just $19.82 billion had closed. In 2008, these figures were $137.23 billion targeted and a more impressive $54.38 billion closed.

Against a backdrop of cautious post-global economic downturn investor sentiment, these figures and that comparison might suggest that a significant proportion of funds currently in fundraising mode have not or do not appeal to the LP community at large as they did a couple of years ago. Do the fund managers of these vehicles need to go back to the drawing board and come up with something else?

One obvious area to evaluate is the fee structure. Fees on committed capital have come under scrutiny as has the traditional two-and-twenty model. Claw-backs, distribution waterfalls, you name it – each of these terms has been or is being scrutinised by investors before they write out that much-coveted cheque.

While firms are certainly trying to become more innovative in the way they address their remuneration, others have decided instead to redraw their fund structure entirely.

This morning, PERE revealed that Pacific Star, Singapore’s largest private equity real estate firm, had decided to mesh two fundraising efforts for funds with differing strategies into just one. To read the full story, click here.

Arguably, timing wasn’t on the firm’s side when it launched the two pan-Asia funds. After all, the open-ended Asia Fund Select and the closed-ended Enterprise Property Investment Corporation were marketed just months after the collapse of Lehman Brothers. But more than a year on and with little traction from investors in their current guises, the firm amalgamated the two vehicles into one.

The new Pacific Star Asia Fund IV – Asia Fund Select, which is to be launched this quarter, will aim to coral approximately $1 billion by offering a product with key components of each of the two aborted predecessors. It will be closed-ended, have pan-Asia as well as more concise, sub-regional investment options and will take in the investment strategies of both Asia Fund Select and Enterprise Property.

Benett Theseira, president of direct investments and private equity told PERE the pulling of the two funds and subsequent launching of a meshed new version followed advice from Pacific Star’s investors as they tried to garner commitments for the funds in their original guise. “During [2009] we continued to engage investors through several road shows and we took the sessions as an opportunity to listen and understand their feedback,” he said.

There is no need for Pacific Star to be embarrassed about the problems it ran into with last year’s propositions. As one commentator says: “This is symptomatic of what’s going on at the moment. Until you take your fund out there, it can be difficult to learn what works and what doesn’t.”

And he says that there is little reputational risk to a general partner who redesigns its offering at this point in the market cycle, just a couple of years on from the downturn: “If they’d done it at the peak of the market, it might have been different. I think it shows they are confident that their investors like them.”

Given that market sentiment has improved considerably since the last time the firm went out, this sounds about right. Chances are this new fundraising will work a lot better. If it does, Pacific Star will be able to say it drew the right conclusions from a recent disappointment.