FUND ADMINISTRATION: Nourishing a spin out

Setting up an investment firm is about more than deciding on an investment strategy and snapping up distressed properties. Mark Shepherd asked two new fund managers and a fund administration professional about the practical – and less reported – difficulties of striking out on your own. PERE magazine's Fund Adminitration supplement, September 2010

Nothing too fancy

Nikolaus von Blomberg
Founding partner, Indigo Invest

Nikolaus von Blomberg can at last cast his eye around his new office in Dusseldorf’s Stresemannstrasse with some relief.

Last summer, having spent several years at asset management company Corpus Siero as director and fund manager responsible for around €250 million of assets under management, von Blomberg decided to strike out his own.

In launching Indigo Invest, a real estate investment firm with a focus on Germany, though, von Blomberg was confronted with a problem a million miles away from thoughts of investment strategy, real estate number-crunching and tax structures for funds – how would he get the telephones to work?
Indeed, it wasn’t just the telephones that were an issue for the founding partner. Von Blomberg also had to decide about the company’s website, its logo, even what image Indigo’s office should portray to investors when they walked in with capital to invest.

“Deciding on space and furniture were one of the many important issues in setting up an office for Indigo Invest,” says von Blomberg. “You have to find a good balance between too fancy and cheap appearance. On the one hand we didn’t want to come across as a law firm with lots of art on the wall and streamlined chairs. On the other we didn’t want people to think they were walking into an IKEA. “
Unfortunately for Indigo, time was not on their side. Due to delivery delays, von Blomberg, along with his partners, Stefan Schraut, former senior vice president of investment and global banking at Pramerica Real Estate Investors, and Jan-Hendrik Goldbeck, formerly of IVG Real Estate, had just six weeks to get it right.
“We went to a range of different providers for our furniture and fit-out,” says von Blomberg. “At the end were able to find a very attractive solution in quality and costs.”

Choosing the right offices was also a crucial consideration for Indigo. Eschewing the option of basing itself on the Konigsallee, the lengthy boulevard which plays host to Dusseldorf’s luxury shops and high-end offices, von Blomberg says the firm had to be faithful to its budgets.

“When you are setting up a firm you have to be realistic about how much you want to spend in the early days,” he says. “You are always playing off the price you want to pay for the accommodation, against the length of lease you feel comfortable with in the early days. Your premises will be a big commitment at the start but it is also the public face of your operation.” Indigo has taken a three-year lease on its offices with options to extend.

Von Blomberg continues: “Besides the office set up, a lot of other important points have to be considered. This can be anything from the right acquisition structure, tax issues, finding the right staff to creating a website and so on.”

None of that, however, was as interesting as Indigo’s first two weeks of existence. “The phone company turned up on the wrong day to connect us and then we had to wait two further weeks before we could get another appointment,” von Blomberg recounts. “It was a strange atmosphere – sitting in our offices with none of the phones working.”

Branded or

Marc Giraudon
Partner and
Langham Hall

If you were to walk into Langham Hall’s offices in either London or Hong Kong, partner and co-founder Marc Giraudon is counting on the fact you will assume they are owned and operated by the fund manager itself.
Despite the fact the firm’s offices are part of a serviced property, you will not see any serviced office branding.

“A choice you will face if you go the route of using serviced offices is whether you will use a branded operator or non-branded one,” Giraudon says. “The differences it can make to the way your operation is perceived could make the difference between being seen as having substance or having set up just yesterday.” For Giraudon, branded serviced offices may not give you the special attention you need to ensure investors have a good sense of the credibility of your fund. For example, they may walk in and see the office provider’s latest deals advertised on the wall. “It’s not a good look if an investor walks in and the landlord is offering cheap offices at knockdown prices,” he says.

Unbranded serviced offices, conversely, create an image of longevity and stability. There will be nothing to identify to visitors that the firm, founded in 2005, is one of many tenants. It also affords the opportunity for reception staff, only too aware that each visitor is potentially a lucrative investor for the firm, to give a more tailored service.

“You have a bit more control in an unbranded serviced office,” Giraudon adds. “You can ensure that when someone comes in, the reception staff can quickly and professionally direct them to you. The impression your firm gives starts the second somebody walks in.”

The UK has a sophisticated serviced office industry, but there are greater challenges for funds setting up in markets such as Asia. Giraudon had first-hand experience of this while establishing Langham Hall’s Hong Kong base in 2008.

“In the UK you know the big names well, but it is not the same story in places like Hong Kong,” he says. “It is a lot more difficult to ascertain what kind of service you will get and who is providing it.”
The pitfalls abound.

“I heard a story where one serviced office provider moved its tenants three times in three years. It can be a problem when you are in places you are not familiar with. You just have to do as much research as you can,” Giraudon concludes.

Getting IT

Maqbool Mohamed
Director of business development
Citco Real Estate Investment Funds Services

It used to be the case that real estate fund managers starting out could do so with a telephone, desk and a personal computer.

These days, however, they are being advised to invest in ever-more sophisticated IT systems so they can cope with the complexities of their craft.

“You need to set up your fund operations effectively from the outset,” says Maqbool Mohamed, director of business development at Citco Real Estate Investment Funds Services.

The key goal of fund management IT is harmonisation. Those real estate funds that operate across jurisdictions are particularly vulnerable, he says, if they don’t have the appropriate operating model in place.
“Your property manager in a certain country might, for example, consistently report a property’s cash flow incorrectly,” says Mohamed. “Not only would this result in a misrepresentation of the performance of the asset but it could ultimately have a significant impact on the waterfall calculation.”

He says the value of certain portfolios may differ between jurisdictions and currencies, making it difficult for managers to decide upon the true performance of their investment decision.

Since the credit crunch, LPs have called for greater clarity and more information from GPs about where and how their funds are performing. The complexities of operating Europe-wide have made it difficult for managers to make decisions, he says, as the true performance of the investment is not always transparent, he says.

“The last 18 months have highlighted the need for fund managers to know exactly what they have got and how their assets are performing,” says Mohamed.

“Moreover, the level of information being requested now is much more detailed and it is has to be available much more quickly. Automating certain back-office activities by using the appropriate fund accounting system can certainly help to make this process significantly more efficient.”