Friday Letter Market of one

Investors at the PERE Global Investor Forum 2012 in Los Angeles spoke about pursuing more tailored options for deploying their capital in the asset class. Many GPs are paying attention. Those still not, should be.

Whether taking the stage or speaking on the sidelines at the PERE Global Investor Forum in Los Angeles earlier this week, private equity real estate investors made it clear that one size doesn’t fit all anymore.

It wasn’t all that long ago when limited partners adopted a herd mentality with regard to deploying capital in real estate. Arguably they had little choice given the few types of products on offer previously.

But as negotiating power has shifted from general partners to limited partners in the wake of the downturn, a growing number of investors have expressed a desire to exercise more control over their real estate investments. Increasingly, LPs have been breaking away from the pack in search of more individualised strategies that better fit their specific needs and goals.

“Every LP has unique criteria,” one delegate told PERE. “We’re not built the same. We all have different constituencies, different actuarial obligations.” That was a central message to come from the Forum.

To be sure, there remained some common wants among the LPs at the conference with regard to their real estate investment programmes. Many investors, such as CalPERS, CalSTRS and Allstate Investments said they were pursuing more income-producing real estate strategies instead of opportunistic plays, as they looked to the asset class to help plug income shortfalls.
Another common trend among LPs at the event related to gearing. Those that were interested in pursuing value-add or opportunistic strategies wanted to do so with lower leverage.

But there were many divergent views imparted on PERE’s LA stage also. CalPERS, for example, said it was staying away from opportunistic plays in Europe, while CalSTRS – which currently has a 50 percent opportunistic and value-add real estate allocation to CalPERS’ 30 percent – remained open to select opportunities in the region. CalPERS expects to put out more capital than receive back this year, while CalSTRS is in the reverse position. These guys want their needs to be catered for.

LACERA, meanwhile, has already engaged with a separate account specifically built for it to invest in real estate debt. It plans to invest an additional $300 million in the strategy, which it said it has found to be an effective way to generate income and earn equity-type returns without taking equity-type risk.

These LPs are increasingly are becoming a “market of one,” as one delegate termed it, as they are seeking bespoke investment options to meet their preferences from their GPs. Investors want offerings that fit their specific criteria, even if it means they’re the only one in the market with that type of investment profile. More ‘tailor-made’ and less ‘off-the-rack’ in other words.

Not that GPs are ignoring these demands. Away from the conference, PERE reported on Tuesday how start-up Hong Kong fund manager, Moonbridge Capital, had constructed a fund that offers for the first time a vote on the firm’s investment strategy half-way through its investment period, for example. That departure from the traditional fund model was a gesture derived from a pre-marketing canvassing of opinions from potential investors.

There are many firms that are these days asking their investors how they want to invest in real estate. But, to those managers still not wrapping their services, and ultimately their products, around what the capital wants to be doing, this week’s LA Forum should have sounded yet another knell to deliver the message: You cannot be everything to everyone anymore. Many of your investors want to be offered the bespoke option instead.