NEWS ANALYSIS: Band of LP brothers

LPs need to be more united when facing GPs – even if it means telling fund managers to leave the room so they can talk privately. PERE magazine, November 2009.

Limited partners have never been the most banded of comrades. However, for chief executive of Cohen & Steers’ multi-manager group, Stephen Coyle, LPs should be exactly that – much more united.

As real estate investors contemplate their portfolios and negotiate with sponsors about legacy assets and potential fund recapitalisations, Coyle warned LPs need to be prepared to change themselves before they can successful change their GPs.

“I think for much too long LPs have been passive, in part because they have been isolated from one another,” he said. Instead, Coyle has called on LPs to start acting as a united front, meeting as a group before advisory committee meetings and annual meetings to discuss and prioritise topics for debate on behalf of all LPs.

“It’s not about them and us as GPs and LPs, and it’s not about trying to overthrow a GP, it is about being more united as an investment community. LPs need to learn how to act more like a family,” Coyle added.

Having “time out” from the GP would allow limited partners to have their own arguments “behind closed doors”, so that a focused debate could follow regarding legacy assets, potential recapitalisations or potential deals. “Too often, LPs end up arguing with each other in these meetings and they go off topic,” he said.

There has been muted talk of such “action” among institutional investors, although anecdotal evidence suggests it has yet to happen. Coyle suggested though that as a first measure LPs at least start by spending time with GPs out of the room especially if they want to refocus the debate.

“This is all about trying to make the best out of a bad situation,” added Coyle, who joined Cohen & Steers with his funds of funds team from Citigroup Property Investors.

With US limited partners meeting for the fall conference of the Pension Real Estate Association (PREA) as PERE went to press, LP rights and demands have come under close scrutiny. For Coyle, LP priorities relate to talent (as in “keeping your people”), GPs proving they are “fiduciaries” with a long track record. However, he insisted, good times were approaching – for LPs and GPs alike.

“We are just starting to see opportunities. I’ve not had any desire to put money into the market since arriving at Cohen & Steers [in April 2008] or even late 2007. But we are now starting to see one-off deals, where assets are trading at values below replacement costs without land, and that is typically an attractive entry point,” he said.
“It looks like a dam at the minute.

The first spurts of water can be seen breaking through the cracks in the dam. The structure isn’t shaking yet, but you can see that the foundations are not solid. We know the dam cannot last and in the end it will break down and the water will flow over what’s left of the structure.” That, Coyle said, should be later this year and into 2010.

But for a number of LPs that breakdown will mean more pain ahead. Coyle predicted that for many 2005 to 2008 vintage funds, LPs won’t see the return of anymore capital. “Plain and simple, with leverage of between 75 percent and 80 percent, there is just no way out of that situation, short of negotiating with the lender which will require equity on the GP’s part.”

Part of the reason, Coyle said, why LPs need to start talking more to one another. “LPs as a group need to start pushing their GPs as to whether or not to recapitalise assets.” This discussion, he added, should be done on an asset-by-asset basis because “too many times, if a fund still has capital or if the fund can recall capital, the GPs are trying to recapitalise too many (if not all) the assets.”