Investors express satisfaction with manager relationships

Investors seem happy about the way their real estate portfolios currently look, with only small tweaks likely to be made in the year ahead.

Investors in private real estate are some the most content across the alternative asset classes, along with those in infrastructure, according to the results of the PERE Investor Perspectives 2019 survey.

This is especially true when it comes to the number of managers they currently work with – 37 percent say they are satisfied with the number, higher than in private equity, where 30 percent want to maintain the current number of relationships with managers.

In addition, just less than half of the survey respondents – 45.6 percent – say they are planning to make fresh commitments to existing real estate managers in the next 12 months, with 24.4 percent unsure about their plans. The remainder report they do not plan on making fresh commitments to their existing real estate managers.

Not only are investors highly reliant on their current fund managers, 56 percent are also shunning first-time funds, and only 3.4 percent report a defined allocation to it. About 10 percent of investors do not currently invest in first-time real estate funds at all, but plan to do so in the future. In private equity, by contrast, 51 percent invest in first-time funds and 9.2 percent have a defined allocation to it.

Despite being somewhat satisfied with their current portfolios, there are some small changes investors in private real estate are hoping to make in 2019. For example, nearly 38 percent of respondents to the PERE survey plan to increase their number of manager relationships. This is some way short of the 52 percent of respondents looking to increase the number of manager relationships in private equity.

Writing big checks

As far as the fundraising environment goes, investors across asset classes seem satisfied with their experience committing to funds in the past 12 months. Nearly 60 percent say they have constantly received their full requested allocation in their chosen funds. At the other end of the spectrum, 28 percent said they have had their allocation scaled back in most of their chosen funds due to excess demand. That question was not broken down by asset class.

And once investors are ready to commit, private real estate funds receive the biggest checks from investors at $100 million on average, followed by a $73.3 million average fund commitment in infrastructure, $67 million in private debt, and a $65.7 million in private equity (see p. 7). The average commitment size is likely to remain steady in the next year, according to the survey, as 69 percent of investor respondents said it will stay the same over the next 12 months, the highest of all asset classes. Less than a quarter, or 22.2 percent, said it will increase.

Diligence focus areas

The top three factors representing a major part of investors’ due diligence during fundraising are the manager’s team size and its investment capacity, the investment thesis and whether the manager has drifted from it, and the firm’s culture at the manager level. There has been, of course, much emphasis in 2018 on equal pay across all business sectors. The alternative asset space has been no exception, but the survey results indicate that this is still not top of mind for investors when conducting their due diligence – only 4.8 percent report this issue to be a major part of the diligence process while nearly 57 percent do not cover it at all. On ESG, another theme growing in importance for the industry, almost 37 percent of respondents consider it to be a major consideration in real estate fund due diligence while 41 percent see it only as a minor consideration.