The question of whether the real estate multi-manager industry is primed for significant growth depends on who you ask.

Firmly in the pro-growth camp is LaSalle Investment Management, which, fresh from closing its acquisition of Aviva Investors’ indirect real estate platform, is already working on further expanding its footprint in the multi-manager space.

Jacobson: multi-manager business has become ‘very interesting’

The new entity, LaSalle Global Partner Solutions, encompasses Aviva’s $7 billion real estate multi-manager business; LaSalle’s existing Europe-based global indirect real estate group, with $1.5 billion in assets under management; and LaSalle’s $1.2 billion global co-investment program. The combined group has about 40 employees globally and manages more than 50 mandates and funds.

“We think it is highly scalable,” says LaSalle global chief executive Jeff Jacobson of GPS. “If you look at some of the other leaders in this sector, they are at $20 billion and they’re growing fairly rapidly. At this level, we’re number three or four. Our goal is to be number one.”

To operate on a large-scale, “you have to have people on the ground in all three regions, you have to have people who have capabilities to do both the more traditional multi-manager core investing, as well as co-investing, as well as originating joint ventures and clubs,” he says. “Once you get to that level, the business starts to scale.”

Since its inception more than a decade ago, the multi-manager space has broadened and “started to get a lot more interesting,” says Jacobson. “Investors are looking for different ways to get more exposure to indirect real estate, when they don’t own assets outright.” In addition to investing in funds, they would include co-investments and joint ventures that would potentially invest in boutique platforms or emerging strategies.

“We’re seeing others really develop those businesses,” says Jacobson. “We would see more and more investors looking for that comprehensive suite of capabilities and the business getting very interesting. We had some of the pieces on our own. Ed [Cassell’s] business at Aviva had some of the pieces on its own. None of them at the scale globally to do it at the level we thought we wanted to do it at it. By combining it and putting it under one team, under this Global Partners Solutions group, we believe we have one of the leaders in the industry. That’s what drove it strategically.”

Evolution of the multi-manager space

This necessary multiple components of a multi-manager platform today is in stark contrast to 15 years ago, when funds of funds focused solely on investing in other funds.

Giller: sees ‘a tremendous amount of growth’ driven by overseas investors

“The problem with the sector is that the funds of funds managers were really overpaid for the value they actually contributed,” says Jeff Giller, head of StepStone Real Estate, which focuses on fund investments, secondaries, co-investments and recapitalizations. “Pricing funds and researching funds, although it requires a broad set of skills and a lot of knowledge and data about managers in the market, the value-add content is significantly lower than buying, selling, managing, financing and disposition of real estate. Even at a discount, the fee and carried interest structure for just picking funds was overcompensating managers. The economic model just didn’t make sense.”

At the same time, most funds of funds managers significantly underperformed, Giller adds. “That led to a real dislocation in the funds of funds manager world. A lot of funds of funds went away or morphed into other things.”

Examples include manager Madison Harbor Capital – the former firm of Ed Casal, chief executive of LaSalle GPS and former chief executive of real estate at Aviva – which was acquired by Aviva in 2009; Cohen & Steers’ and Mesirow Financial’s real estate multi-manager businesses, which were wound down in 2013 and 2015, respectively, as was Amsterdam-based Composition Capital Partners in 2017; and Copenhagen’s Sparinvest Property Investors, which was taken over by Patrizia Immobilien in October 2017.
There may still potentially be a need for a pure fund of funds strategy, however, particularly for very small investors unable to hire an advisor to help them construct a customized portfolio. “A fund of funds may be the best way for them to get diversity in their portfolio,” Giller says. “But I would think the fee model would need to adapt.”

Indeed, “non-listed real estate funds of funds remain important vehicles offering investors significant diversification options,” according to a funds of funds study by private real estate associations ANREV and INREV, published in July. The percentage of capital raised for funds of funds doubled in 2017 to €8.1 billion, or 5 percent of an overall €152.3 billion raised for private real estate from €3 billion, or 2.5 percent of total capital raised in 2016.

On the other end of the spectrum, some multi-managers have abandoned fund investments entirely. When approached to be interviewed for this story, one firm that previously pursued the strategy told PERE it was focused on direct secondary transactions and direct equity “but had no views on the indirect approach.”

The role of fund investments

Still, many multi-managers continue to include primary investments as part of the mix. StepStone Real Estate itself entered the real estate space in 2014 with the acquisition of secondaries and co-investments firm Clairvue Capital and the hiring of former Citibank and Cohen & Steers fund of funds executive Dev Subhash as partner. It further expanded the platform with the purchase of real estate consultant Courtland Partners this year.

The firm now views primary, or fund investments as belonging in an advisory relationship, where investors would not be charged capital management fees or carried interest, but an advisory fee significantly lower than a capital management fee. “You’re really paying for work performed rather than the amount of capital you manage,” Giller says.

He notes that while StepStone Real Estate has $5 billion in assets under management, it has $102 billion in assets under advisement where StepStone is helping institutional investors build portfolios of fund investments.

But while primary investments would serve as the foundation of an investment plan for an investor, a well-rounded portfolio would also include an allocation to secondaries to add alpha and to help to mitigate the J-curve of fund investments, while co-investments would allow the firm to invest opportunistically in specific deals to generate alpha for the portfolio.

“It works together to form a single, customized investment plan for an institutional investor,” says Giller. “That’s the model we’ve employed to replace the one-size-fits-all fund of fund model, which we think is obsolete.”

Meanwhile, LaSalle GPS will invest in the four real estate segments of public, private, equity and debt through third-party and in-house commingled funds, joint ventures and club deals, co-investments and secondaries.

LaSalle declined to comment on specific offerings, but PERE understands the first product the Chicago-based investment manager could evaluate include a global core open-ended commingled fund. Similar to comparable funds in the market, that vehicle could be income-oriented and focused on relative value globally. The firm also is considering a closed-end fund that would target both tactical opportunities such as tail-end fund investments as well as co-investments.

Speaking generally on products, Casal says LaSalle GPS’s offerings would be more diverse in terms of risk/return profile than those of Aviva’s multi-manager platform, which had historically been more core and risk averse. “Over time, I wouldn’t say we’re going to move too opportunistic, but we’ll be more across the risk spectrum, keeping the strength of our core capability, our income producing capability, but also taking advantage of the relationships we have to be a tactical investor in real estate,” he says.

Although LaSalle GPS would primarily be seeking to expand its platform through scalable vehicles, it would also be open to larger, customized accounts. “To do customized strategies, I would say this is true for all of our business, it has to be at a certain scale,” says Jacobson. “Some of the big funds out of Asia who are investing in directs, who are wanting separate account strategies, if you’re $1 billion or above, you can customize, and we and others are very interested. If you’re a $100 million separate account, maybe some people will customize for you, but we probably wouldn’t, because we can’t dedicate the resources, we probably can’t make any money out of it. You can customize, but a Savile Row suit is not cheap.”

Growth potential – or lack thereof

Like Jacobson, Giller sees significant growth potential in the multi-manager space, but primarily in advisory-driven investment as opposed to capital management driven investments. “There is a tremendous amount of growth coming out of non-US jurisdictions, such as the Middle East, Asia and Europe, they’re all starting to lean more and more into real estate investing. Most need to start to build their programs and they need help and guidance to do that.”

Another emerging opportunity for multi-managers is in the defined-contribution plan world, where funds are being set up to allow individuals to invest their retirement money in private real estate funds, Giller says. StepStone currently is acting as a sub-advisor to an interval fund that provides individual investors with access to private equity real estate funds, potentially for their 401(k) plans, with the firm charged with doing due diligence, selecting managers and monitoring the investments for the program.

Yet not everyone believes there is room for major expansion in the industry. “The multi-manager space has not been growing at that rate, one that can support the doubling of a firm’s AUM in any reasonable timeframe,” says one multi-manager who declined to be named. “If we had ambitions to double, I don’t think we could do that either.

“The multi-manager space in my mind is getting fiercely competitive. The clients have become smarter and discerning. With several recent mandates, they asked us what our performance looks like in different markets. Investors have become very sophisticated in their evaluations.”

For this reason, “there has been a lot of concentration that has started to take place. Everyone will get some piece of the action, but in order be able to double AUM, you have to consistently outperform your competition in most of the important mandates that get handed out.”

He predicts that between two and four multi-managers will eventually claim 60-70 percent of mandates in the space, not dissimilar to the levels of concentration among traditional fund managers.

“Having a large AUM, large AUA, good performance, a big team, those things have become very, very critical to have in place,” the multi-manager says. “Today, either you have it or you don’t. You can’t say, let me start building those things today.”