MIPIM 2008: Morning after

Despite the party mood in Cannes, private equity real estate general partners acknowledge that in the current fundraising climate power is shifting decidedly to LPs.

The surviving delegates at the MIPIM property show are either on the beach or headed back home nursing bad hangovers.  The question now is whether those hangovers are going to last into the rest of the year in terms of real estate investing.

Generally, the mood among the 28,000 delegates at this year’s jamboree in Cannes has been bullish. As the myriad of packed beachfront and hotel parties exemplified, real estate professionals across Europe and indeed those from outside the region are happy with their lot. That goes for those involved in the private equity industry as well, if the upbeat mood at the evening events are anything to go by.

Our correspondent met with an array of participants from GPs and LPs to placement agents and accountants (in varying stages of liquid refreshment) and the consensus view seems to be that the industry is well positioned to flourish.

However drill down a little deeper, and for some fund managers the feel-good factor might be as short lived as the bubbles in their champagne glasses. Continued flourishing will come at a price exacted by limited partners.

Though there is a large amount of fundraising activity at present and no shortage of capital, some GPs are finding it tough going. One of the main pressure areas seems to be on fees linked to performance. More specifically, there is real pressure on the catch-up term, according to one well placed source who raises equity for fund managers. The morning after a large evening, he explains over a strong coffee in one of the jammed beachfront cafes in Cannes that some fund managers are lowering their fees. He also says that the climate is extremely tough for those raising first-time funds.

Over in the nearby Majestic Hotel, a real estate director from a dominant accountancy firm confirms the party is over in terms of the catch-up levels some managers have come to expect.

According to him, there has been no slow-down in fundraising activity and, if anything, there is an increasing amount. However, the advisor notes that greater transparency is impacting negotiations.

He says: “Investors are being able to compare and contrast different investments people are making in real estate firms and therefore there is a lot more challenge. One of the specific areas we are noticing is the carried interest catch-up. Previously, after the initial return of capital and the initial return to investors of a certain amount there would have been an 80/20 split in the carried interest individual’s favor. The norm is now moving more to a 50/50 split.”

In the limited partners agreements he is seeing these terms constantly challenged now and renegotiated. “As more people come into the market, LPs suddenly think, ‘I am not paying this to somebody else, so why should I pay you these terms?’”

No one argues from MIPIM that fund managers shouldn’t be incentivized, but amid weakening performance there is a growing recognition that the playing field for GPs and LPs is becoming more level. Fund managers are leaving Cannes today with some great nights behind them. It will be interesting to note if the champagne will be quite so abundant next year.