The recent spate of public capital raises for opportunistic real estate investment platforms in Europe was capitalized largely by ‘momentum investors’, and this type of capital could leave the market as quickly as it arrived, delegates at the PERE Summit: Europe in London heard today.
On the opening panel session, a fund manager-dominated panel that included Aref Lahham, managing director at Orion Capital Managers, Bill Benjamin, senior partner at Ares Management, and Jason Blank, co-managing director at Brockton Capital criticized these public capital raises as fuelled by investors keen to capitalize most on macroeconomic trends in the region.
“These waves come and go, and as fast as it is raised it is used,” Lahham said. “This is hot money that cannot find returns in the equities markets. It cannot find returns in real estate in the US and it can’t find distress. It thinks: ‘Europe has a recovery story and it is now not going to break up’.” However, he warned: “At some point it will shut down again. Any hiccups in the market, and that capital will fly.”
Lahham added that he was concerned that capital had moved into the European real estate market fast and, crucially, way ahead of real estate fundamentals.
Benjamin described many of those investors that have backed publicly raised funds in markets like Spain as tending to be ‘momentum investors’, such as hedge funds. “With some of the newly formed platforms in Spain and here, there is classic hedge fund momentum by these macro-bet players.”
Comparing the rigors associated with raising private real estate funds with public real estate funds, he said: “We are put through 12 different investor DDQs, so the devil really is in the detail. Can a hedge fund in the US, for instance, really underwrite a Spanish non-performing loan portfolio? I’m sure curious to know whether they understand how to foreclose in Spain. I’m not saying we’re smart and they’re not, but I am saying these are two different speeds for the industry.”
Benjamin further illustrated his point by focusing on the compensation trends for the mangers of the two different styles of investment vehicles. “They earn 2 percent (management fee) over zero distributions, so they’re getting a very attractive compensation structure for perceived liquidity,” he explained. “We are typically at 1.5 percent and 20 percent over whatever hurdle. It’s a Venus and Mars situation, where the compensations are different.”
As such, the panel criticized public vehicles for their onus on deploying capital quickly, something Blank described as akin to choosing levered beta over the alpha that private funds can generate. “Most of the listed vehicles I’ve seen collected their capital on day one. If the GP invests his capital as quickly as possible, he definitely doesn’t take care. He doesn’t get the chance to be careful and try to find opportunities.”
Fiona D’Silva, managing director at Kennedy Wilson Europe, which earlier this year raised £1 billion on the London Stock Exchange for a pan-European opportunistic real estate fund, also was on the panel. She said the investors in Kennedy Wilson Europe’s fund were in fact similar in approach to those in conventional private equity real estate funds in that they had a longer-term perspective on their investments. “Most of our investors have been in the space for a number of years,” she said. “We didn’t want much hedge fund money in there.”
D’Silva also drew a further distinction by adding how Kennedy Wilson had committed 14 percent of the capital and that its management would invest a large proportion of its management fee back into the vehicle in a demonstration of alignment of interest with its investors.
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