A prominent GP told PERE yesterday that one of the biggest concerns within the LP community was that of senior executive turnover at the fund managers with whom they invest their equity.
What then must the LPs who have committed capital to Merrill Lynch and Citi Property Investors in Asia or with JE Robert Companies in Europe be thinking? In the last month each of these firms has lost regional heads. In the case of Virginia-based JER, the firm also lost its chief operating officer.
In early April, Merrill Lynch saw its head of global commercial real estate in Asia Pacific, Tim Grady, leave the business. A week later, CPI parted company with David Schaefer, its head of Asia Pacific Investments (see this month’s PERE for the full stories). In February it was JER’s long standing head of Malcolm Le May who left and only two Fridays ago, his boss, chief operating officer Michael Pralle upped sticks and followed him through the exit door.
At the heart of LPs concern on the issue is that of communication. In February, the former head of Michael McCook stood in front of an audience of GPs and LPs at the PERE Forum: Asia, which incidentally included both Grady and Schaefer, and reiterated the need for GPs to stay in their LPs’ faces throughout 2009 even though it is unlikely they will be able to foster any fresh funds from them this year. The message was clear: even if you only have bad news to report, make sure you communicate this bad news, proactively and early. Do not be quiet.
When considering Merrill Lynch and Citi Property Investors, it is worth noting that it was their recently departed platform leaders that boarded the planes to visit their LPs. It was these guys who first shook their hands and then convinced them of their investment strategies. As a result Merrill Lynch successfully enticed $2.65 billion in equity for its first Asian effort, the Merrill Lynch Asia Real Estate Opportunity Fund raised late last year, and CPI closed on $1.29 billion for its CPI Capital Partners Asia Pacific Fund in 2007.
It would be foolhardy to presume the LPs in these case bought into the institutional brands at a level above the managers of the funds themselves. LPs primarily back people.
This notion has been compounded by anecdotal evidence of investor unrest surfacing in the wake of the turnover. Merrill Lynch has suffered from such tales of LPs asking rival GPs to bid for the bank’s real estate business and its equity position in its fund. This has come amid confusion of the future strategy of the platform in the context of Merrill’s recent takeover by Bank of America. Blackstone and Apollo have been mooted as interested buyers. It is thought that Merrill’s new owner is not a keen seller, but it must be concerned that its investors are restless.
Some GPs believe that although commingled, discretionary funds have seemingly fallen out of fashion with LPs (particularly sovereign wealth funds who are said to be shunning the sector in favour of more direct forms of investment), this form of investing will eventually recover its popularity. When it does, they say, it will be better to have the fundraising stars in your team than playing for the opposition.
Message to learn: keep your head (if you can) while others are losing theirs.