PERE NY: Co-existing with the larger funds

The key to thriving as a mid-sized manager is positioning oneself as an alternative rather than a competitor to the mega-funds.

The largest real estate funds may command most of the capital and capture the most high profile deals, but that doesn’t mean there isn’t a place for mid-sized managers, panelists said at the PERE Summit: New York 2015 conference today.

“You have to find a way to co-exist with these larger funds,” said one speaker, whose panel focused on mid-market managers. This means presenting the firm as an alternative, rather than a competitor, to the biggest private equity real estate managers when speaking with investors.

Indeed, another speaker noted that his firm’s institutional investors include pension plans and endowments that commit capital to the larger real estate funds, but invest with his company for diversification. “We’re an alternative to some of the larger funds, and we’re investing in market and transaction sizes below the radar of the larger funds,” he noted.

The markets include the so-called NFL cities, or markets with prominent American professional football teams, such as Miami, Charlotte, San Diego and Kansas City. Meanwhile, his firm typically invests $10 billion to $20 billion in deals that include the four main property types of office, industrial, retail and multifamily, but also niche strategies such as student housing and self-storage.

“We’re not competing with the large funds,” he noted. “That is a space that fascinates me, because it almost is a club. Every large deal, you find similar groups show up.”

A third speaker added that while the largest managers typically make large macro bets in the real estate market, his firm often focuses on one-off transactions where it can generate outsized returns from the acquisition of a single asset.

Another panelist said that it will be a challenge for small- and medium-sized firms to make investments, so his firm is competing through its strategy, which targets more fragmented and smaller deals where it can add value. Fundraising also has been difficult in an environment where the top 10 largest firms are capturing the bulk of the capital, he added.

“It comes down to, do you have a differentiated strategy, what’s your performance and what’s your long term business model?” he says. “It’s going to be challenging, no doubt about it.”

The “What does the future hold?” panel featured the panelists Michael Bernstein of Artemis Real Estate Partners, Leonard Klehr of Lubert-Adler Real Estate Funds and Christopher Merrill of Harrison Real Estate Capital. David Kessler of CohnReznick moderated the session.