GPs should be judged on character, not just performance

As limited partners assess current and potential future fund manager relationships, advisors say performance alone can no longer be a “differentiator” between GPs.

Character – not performance – should be the driving factor behind GP selection in coming years, real estate advisors warned a New York conference yesterday.

Speaking at the USA GRI 2010 event, a group of property advisors said LPs would be looking at the behaviour and character of GPs during the recession – and how they handled investor communications – rather than just performance as a means of assessing future fund commitments.

John Baczewski, president of Ipswich, Massachusetts-based advisory firm Real Estate Fiduciary Services, told PERE at the event: “Performance is no longer a differentiator [among GPs]. It’s how you responded to the difficult markets, it’s how you handled communicating those difficulties with your investors – it’s all about trust.

“If GPs want to survive, they are not only going to have to have a good investment thesis going forward but they are also going to have had to pass the character test,” he added.

The private equity real estate industry will see a consolidation of fund managers, the panel added, with 2010 seeing a rising number of GP mergers and acquisitions.

With management and commitment fees under increasing pressure from LPs, many platforms will need to boost revenues by growing their assets under management. Another factor behind GP M&As will be the ability to grow LP relationships by acquiring another platform. However as one delegate warned, at the “stroke of a pen, firms also inherit the legacy” assets of the platform being bought.