LPs need “solid, straight-forward” answers from GPs

Real estate investment opportunities are expected to increase significantly at the end of 2010 – but in order to enjoy the success of future deals GPs need to pay more attention to investors.

A recent survey of fund managers conducted by Gary Koster, head of Americas’ real estate fund services at Ernst & Young, revealed 85 percent of those questioned expected deal flow to increase or increase significantly at the end of 2010, compared with the end of 2009.

While investors might recall what managers did during the good times, they almost always remember what a fund manager did when the chips were down. Gary Koster, head of Americas’ real estate fund services at Ernst & Young

However, Koster warned GPs that failed to cultivate and nuture investor relations could be excluded from taking part in the opportunity of a generation. “Without access to capital, the turning of the market and return of investment opportunity will be nothing but a footnote in history,” he said in a paper called “The Bottom is Near”.

Recommending going above and beyond simple communication with investors, Koster said some GPs were modifying fund terms and easing requirements, such as reducing capital commitments, lowering fees and slowing the pace of capital calls, in the process helping build “goodwill by easing the pain investors are experiencing. 

“While investors might recall what managers did during the good times, they almost always remember what a fund manager did when the chips were down,” Koster said.

In assessing their own portfolios, Koster said GPs also had to be “brutally objective” as to which deals to save. “Fresh capital should be rationed to those investments with the greatest potential for return.  Those not meeting the bar should be removed from life support in a timely but systematic manner and traded, optioned or left in runoff,” he said.

Warning industry consolidation was “inevitable”, the Ernst & Young partner argued the “best of class fund managers” would be those for whom investors “evaluated their actions, responsiveness and character during a dark period in the industry and found them to be superior”.