ICSC: Beating the odds as a new GP

Despite a difficult fundraising environment that has left many managers sitting on the sidelines, investors and others say it’s still possible for a new firm “to crack the starting lineup.”

To be sure, the odds aren’t in favour of new or first-time real estate fund sponsors when it comes to raising capital. “There are a lot of boards out there that are licking their wounds from 2008 and 2009,” said Alan Forman, director of investments at the Yale University Investments Office, speaking during a panel discussion at the ICSC/NAIOP Real Capital MarketPlace Conference in New York yesterday. “Real estate is not the favourite asset class at the board level, as it has been the laggard for the last four or five years.”

That reality has drawn negative attention to the industry and has made some investment boards less likely to increase allocations to the asset class. In addition, there has been an investor backlash against manager proliferation, where limited partners are allocating greater amounts of capital to a smaller number of managers. “People had too many managers,” said Forman. “Now people are saying, ‘I need fewer managers,’ which obviously makes it harder for a new guy to crack the starting lineup.”

Still, a manager that can offer something different to an institution can get an investor’s attention, noted Phil Riordan, chief investment officer of real estate for GE Asset Management, which manages the pension of the Stamford, Connecticut-based conglomerate. “It’s much easier for me to take the small stable of managers that we use and just say, ‘I’ll triple that allocation, and double that one,” as opposed to inviting new ones in,” he said. “Why introduce yourself to the unknown? The reason you do it is because there’s something compelling about that strategy.”

Although the need for stability has driven GE’s pension plan primarily to core real estate opportunities, the investor keeps the door open to non-core real estate managers that have been willing to expand their investment strategies. “Has anybody from an institutional manager standpoint thought in terms of putting up a value-add or opportunistic fund strategy and backstocking that with current yield payments going forward, so that the institution isn’t looking at the J-curve?” Riordan asked. For example, Angelo, Gordon & Co. did not have a core or core-plus strategy until GE talked to them about expanding their investment focus.

Meanwhile, Edward Schwartz, a principal at ORG Portfolio Management, a Cleveland-based consulting firm, made the case for investors to take on new managers. “There is that natural tendency to want to reduce the number of managers and over-concentrate, but what we try to stress with our clients is there may be somebody better out there,” he said.  “A lot of these managers go through a natural progression, and we think it’s very important to do some rotating through.” Of the top 25 managers two decades ago, only six remain today, he noted.

Susan Swanezy, a partner at Hodes Weill & Associates, said some first-time fund managers have been notable exceptions, such as Wheelock Street Capital, which raised $525 million for its first commingled real estate fund, Wheelock Street Real Estate Partners, in July. While the firm’s co-founders, Merrick Kleeman and Jonathan Paul, had established track records at Starwood Capital and Rockpoint Group, respectively, what also helped were Wheelock’s initial joint venture investments with Boston-based hedge fund manager Baupost.

For firms that are new to raising institutional capital, “what we try to encourage them to do is land joint venture partners or separate account mandates and establish an institutional track record,” Swanezy said. “Demonstrate your ability to execute your investment strategy, then maybe do a club deal and ultimately get to a fund, but that’s how you start today.”