Nori Gerardo Lietz, one of the best-known advisors in global private equity real estate, delivered several warnings to opportunistic fund managers at the PERE Global Investor Forum in Amsterdam this week.
The former chief real estate investment strategist at Partners Group who recently founded independent consultancy firm Areté Capital, said Über funds” – the Sovereign wealth funds – had become competitors to fund managers as they had veered towards investing directly.
In a second warning, she also said that “everyone should be praying that the equity markets recovered soon” because the denominator effect meant many investors were over-allocated to real estate.
Lietz was the keynote speaker at the conference held at the Hotel Akura in a week when financial markets suffered a bloodbath amid a frantic sell-off of equities and commodities. World Bank chief Robert Zoellick said this week the world economy was “in a danger zone” while Christine Lagarde, the new head of the International Monetary Fund, said the path to recovery was “narrowing”.
As well as hitting upon the twin dangers to fund managers of sovereign wealth funds’ increasingly preferred investment route and the slide in value of global equities and commodities, Lietz also said that the large US pension plans were concentrating more on separate accounts, and questioned the model of private equity firms going public, pointedly mentioning The Carlyle Group among The Blackstone Group, Fortress Investment Group, Oaktree Capital Management, and Apollo Global Management. Carlyle only this month filed to go public.
Lietz said: “These groups are going public in order to do what? To replicate the exact same thing as the investment banking model and the question for investors is ‘is the business model any different to the previous strategy that clearly failed?”
Also in her hard-hitting speech, Lietz, who lectures at Harvard Business School, criticised the amount of capital that had been deployed in core assets in major cities. “Multiples on cap rates in big urban areas have been driven down to where they effectively were at the peak of the market. ’How stupid is that? If one is buying something at 3 percent cap rate with economic growth rates that are effectively 1 percent, it is a directional bet on interest rates,” she said.
Instead, Lietz suggested investors should be targeting other strategies. In a rhetorical question, she asked: “How hard has it been for people in this room to raise capital for strategies perceived as risky? But if an investor wants to make money, that is exactly what it should be targeting.”
Finally, Lietz predicted a the shift from defined benefit plans to defined contribution plans as employers moved their risk to the employee would have a profound affect. “They are going to have to say over the next five years that they really cannot make anymore private equity or private equity real estate investment,” she said. At the same time, the shift to defined contribution schemes would end in massive consolidation of power within the consultant community because they were going to be the beneficiaries of outsourced management.