Friday Letter Takeaways from the Tower

PERE presents 10 takeaways from this week’s PERE Forum: Europe conference. 

This week, the Hilton Tower Bridge Hotel in London played host to the annual PERE Forum: Europe conference. Umpteen pearls of wisdom were shared in front of nearly 300 delegates at the swish venue.

For those unable to make it, here is a collection of the more salient talking points:

1. Bit ugly on the macro side: Germany is making life tough for Greece – only the latest destabilizing act in the sovereign debt crisis. Europe is a low growth area, and there’s at least a danger that it could all re-price again, thus making Europe resemble a museum where you look but don’t buy. That sentiment is fuelling suspicion of investors being keener on the US and Asia.

2. Regulatory environment: There are a number of things real estate fund managers should be doing between now and the middle of 2012 to prepare for the onset of regulations such as EMIR, AIFMD, Solvency III, and rules on limiting carry. Message: ignore at your peril. Engage. Educate. Enlighten. The industry has to knuckle down to fine tune the swathe of regulation on Europe’s books. Even then it will mostly be bad. The train is already huffing and puffing and real estate funds are on the tracks.

3. New entrants: No doubt new players are pushing into real estate under the umbrella of large alternative asset class investment firms. Apollo, TPG, and now Kohlberg Kravis & Roberts – whose new head of real estate, Ralph Rosenberg, participated in the Forum – are entering real estate in part because they are seeking to complete the mission to become one-stop alternative asset class shops, or as Rosenberg termed it: “true stewards of capital”.

4. Small players, small future? Not necessarily. Though burdensome regulations highlighted above are probably going to make it very difficult to operate a real estate fund for some smaller players, the good news is that many limited partners are looking for a squad of people that are best-in-class regardless of size. If you are small but tightly focused with a track record that investors can believe in, you should find some traction when looking for fund commitments.

5. Polarised: Linked to point 4. If small managers with geographically-tight and/or asset class specific propositions can attract capital, and the large, pan-regional, multi-real estate asset class beasts like Blackstone and Morgan Stanley can still hoover up big cheques, what happens to the crowd in between? In fact, what crowd?

6. Evolution: Some institutional investors remain wary of commingled funds, but they might still commit if the structure is right. The creative thinkers with innovative fund structures and dynamics that evidence lessons have been heeded can win respect and commitments from the even the most reticent of LPs. Peter Pereira Gray, managing director, investment division at The Wellcome Trust, said he hadn’t committed to a real estate fund for three years. But a couple of weeks ago, an innovative real estate fund structure crossed his desk. Guess what? He’s now looking at the due diligence.

7. You can stop cutting our fees now: There has been so much pressure on fees. The biggest arguably is on structure – the carry should be on the portfolio not asset-by-asset. But some say the point has been reached where LPs can’t keep cutting fees and expect the same level of service from the manager. Pay peanuts, get monkeys.

8. Investor allocation: Allocation to real estate funds is heading south partly because they already have large exposure, partly due to regulatory changes and partly because some prefer the non-fund route i.e. direct or club style ventures. BUT, new investors are emerging. Hooray! Look to more high-net-worths and family offices, suggests Morgan Stanley Real Estate Investing’s co-CEO, Olivier de Poulpiquet.

9. Deals: A lot of people are saying the 2 and 20 model will have to go, but The Blackstone Group refutes that. It said it was seeing a steady ‘loading of the cannon’ of transactions that will be out there for everyone over the years. It will just take a while.

10. Recipe for success: Talk a lot to LPs, retain the best team possible, have feet on the ground in the larger markets. Sounds simple, doesn't it?