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Friday Letter Not a club for all

Club-style vehicles have won plaudits for attracting otherwise unsure investors. But will sellers be impressed? 

Few stories grabbed the attention of PERE readers more this year than Brookfield’s global “turnaround consortium”. The Toronto-based alternative asset management giant said that it had corralled $4 billion in equity commitments (later to rise to $5 billion) from a small number of large investors, and the story shot to the top of our most-read chart within a day.

People were gripped by the thought that amid a dearth of private equity real estate fundraising, here was a firm seemingly able to succeed where others had, for the most part, failed. According to placement agent Probitas Partners just $16.2 billion was raised in the first half of 2009 by value-added or opportunistic funds globally. Brookfield had secured a third of that figure by itself.

Brookfield's announcement focused a lot of attention towards club structures in general, and raised a debate about their effectiveness to secure deals.

While the structure, whereby investments are taken to the consortium to be approved, has certainly won plaudits from the marketplace for offering a transaprency and control to investors, some detractors note there is one key group who may not be so excited: sellers.

While it is certainly better to manage a consortium than to manage no money at all, the manager who can boast discretionary control of his capital is able to move much faster than the manager who has corralled the equity but then must obtain the necessary approvals before he can make an offer. “If you don’t have discretionary money, then the seller is not talking to the decision maker,” one executive said, “The reality is the cheapest deals come fast.”

Difficult then, for the club manager who locates the deal of a lifetime but has 24 hours to make an offer. If his investors are from differing time-zones it’s easy to imagine that deal being lost.

And in this market, how many sellers are keen to send out books on their, perhaps, distressed assets to umpteen maybe-buyers just to have the deal refused by one party because he is suffering from the denominator effect or some such facet nothing to do with real estate?

Another executive suggested those offering consortiums would ideally prefer to manage blind pools and are choosing club structures as a method of cutting their teeth in the sector. Their aim is to develop a track record and rest assured, if successful, they will not be offering a club fund as the sequel vehicle.

That’s not to suggest Brookfield’s turnaround consortium should be sniffed at. $5 billion of capital is still an awesome figure to have aligned in the same direction. Nor is the firm especially in need of cutting its teeth, having closed on more than $500 million of equity for its blind pool North America-focused Real Estate Opportunity Fund.

This is just a note of caution that, effective as clubs may be in convincing investors to take part, they may not always be the buyer of choice for the seller of that once in a lifetime asset.