MIPIM 2014: The manager discretion debate rages on

Years on from the disastrous fund vintages of the global financial crisis, there remains a meaningful difference of opinion between managers and their investors in terms of how much discretion over investments that manager should enjoy.

Delegates at a seminar by the European Association for Investors in Non-Listed Real Estate Vehicles (INREV) today heard suggestions from Eric Adler, the newly-appointed chief executive officer of Pramerica Real Estate Investors, and Patrick Kanters, managing director of global real estate at Dutch pension administrator APG Asset Management, on how future private real estate vehicles might be structured in an effort to find an acceptable level of manager discretion.

Adler said it was important to provide investors with investment vehicles that could be flexible in strategy in order to match the fast-changing opportunities currently arising in the region. “In Poland, cap rates have moved quickly. Spain, Italy and France are not far behind. For GPs, it’s not about categorizing the offer so much, and LPs need to give flexibility to GPs to enable them to respond to these opportunities,” he explained.

Adler believes a model that enables a manager to switch tact quickly, but that also enables investors to have a mechanism for “ratcheting up control” after periods if certain targets are not hit, could be a solution. He also believes that traditional blind-pool commingled funds, which typical see the manager enjoy total discretion, currently are taking too long to raise to effectively pounce on Europe’s fast-changing market opportunities.

Accordingly, Adler suggested a vehicle that could offer something of a compromise between the traditional format and the notionally more popular club vehicle – typically raised much faster but with limited or no discretion – should appease both managers and investors. “Perhaps we’re not talking about new products, but products with tweaked governance in terms of discretion for the team,” he said.

“Talk of control is always difficult,” reasoned Kanters, who has partaken in a number of investment clubs on behalf of APG since the global financial crisis. However, acknowledging a wall of capital currently sitting on the sidelines of the private real estate investment market, particularly that of smaller investors, he said: “We will all have to rely on GPs going forward. We all want more control – the ability to approve or decline deals or approve lending – but we could have missed opportunities while we’ve debated governance structures.”

Kanters suggested there might be scope for semi-open-ended funds in the future and particularly for funds that offered investors controls over fund exits. “Perhaps not unanimous control,” he said, “but it would need to be properly documented in the governance structure.”

James Raynor, head of Grosvenor Fund Management, said that control over exits were as important as controls over making an investment in the first place. “There has been a lot of value destroyed by arbitrary exits. I don’t think redemptions are the answer, but perhaps some sort of accelerated exit provision could work,” he added.

Raynor did not agree with Adler’s desire to be able to switch strategy swiftly. “We should stick to our knitting,” he said. But he noted that, while managers should be “investment strategy-rigid,” they also should be “capital structure-flexible.”

Monica O’ Neil, panel moderator and head of investor relations at Tristan Capital Partners, said it sounded like a “super club” was thus on the cusp of being created and that would address what she termed as a natural tension between “speed to market” needs of managers and investors’ appetite for better controls. Without this evolution, clubs – which might be able to corral capital quickly –would likely not survive as their managers take too long to garner approvals from their investors to execute on a market opportunity that is moving too quickly for such structures. “Speed to market is becoming too important to us,” she added.