In search of solidity

A breakdown in trust since Lehman Brothers and AIG has led investors to question the financial solidity of even the largest GPs, leading to a slowdown in fundraising.

In times of distress, there will always be a flight to quality.

However following the collapse of Lehman Brothers and the near failure of AIG, even some of the largest private equity real estate funds in Europe are finding it difficult to overcome the fear that has now gripped the investment world.

In a rare interview, Londonbased Christophe de Taurines, founder of placement agent Capital & Marketing Group, said that what had become important to investors now was not just the leverage employed in a fund manager's portfolio – but also the “financial solidity” of the GP as well.

“Lehman Brothers and the nationalisation of AIG have created a huge amount of mistrust not only of large asset managers but also those deemed to be excessively leveraged on the balance sheet as well as on their portfolio,” he said.

Even for banks and other large financial sponsors, investors were now questioning what would happen if there was a “run on the bank” or whether there was a significant drop in share value.

Though some European-focused real estate and infrastructure funds are due to close their fundraising efforts soon, de Taurines confirmed a collapse of confidence had led to a slowdown in fundraising – even for GPs which were previously unquestioned in terms of their financial position.

In addition, fund managers that are on the fundraising trail with a vehicle already populated with property investments are being challenged by investors about the valuation of the portfolio, again, hampering fundraising progress. In some cases, investors have become concerned that fund managers are not adequately writing down the value of the investments given the current market situation, says de Taurines.

“Investors don't know the volume of toxic assets some of the banks have on their balance sheets and whether all of this has come out. There is a flight to quality of the GP and a change in perception of what quality means,” de Taurines added.

“Quality now means a counter-party that is seen as rock-solid and with transactions in the fund that will provide stabilized cash flow.”

Even intermediaries, such as placement agents, were being sucked into the mistrust of financial institutions, he continued, saying firms were now being asked where their accounts were kept as part of credit background checks, especially those maintained offshore.

In Europe, this follows the nationalisation of Iceland's three largest banks. Meanwhile, hedge funds, which have been active in real estate in recent times, are being quizzed about redemption levels, bank finance arrangements, their shareholder base and whether their shareholders are themselves at risk of bankruptcy.