Five years after the global financial crisis, terminating underperforming managers hasn’t gotten any easier for limited partners, delegates at this year’s PERE New York Summit in New York heard.
After the crash, one of the problems that plagued the private equity real estate industry was the difficulty of terminating poorly performing managers, at a time when there were numerous poorly performing managers. “It was like the Roach Motel. You could check in but you couldn’t check out,” said Ted Leary, founder and president at Crosswater Realty Advisors, moderating a panel.
One of the challenges when it comes to terminating a manager was the time, effort and capital required to gather all limited partners around an issue, said panelist Steve Hason, co-head of Americas real estate at APG Asset Management US, which sold its 12 percent stake in the ProLogis European Properties fund to ProLogis in a high-profile transaction in 2011. “Back in 2008 and 2009, everybody had so many things to deal with, it was impossible to just put out one fire at a time,” he said.
Hason also noted that many investors negotiate for rights that they are not quite sure how to use. “You always have to make sure that the rights that you ask for, you have to understand what the consequences are, and you may have to actually use those one day,” he added. Additionally, in some cases, after underwriting the fund, investors realized that termination wasn’t worth the effort, because there didn’t appear to be enough value left in the fund, either because of the amount of leverage in the vehicle or a significant value of assets had been lost.
Mark Canavan, senior portfolio manager of real assets at the New Mexico Educational Retirement Board, however, took a much harder line, faulting many public institutions for being too lax on underperforming managers.“There’s this complacency, this lackadaisical nature of the government investor that’s terrifying,” he said. “For all of the government investors here: stop being lazy. Hold GPs to task.”
He added that New Mexico ERB has structured fund agreements as no-fault divorces, and has had no problem pulling out of vehicles should problems arise. “The concept of doing your own work, the concept of holding people accountable, the concept of holding yourself accountable, it’s a religion to me,” he said. For other people, it’s not.”
But Elisabeth Troni, global strategist of global real estate at UBS Global Asset Management, pointed out that staying with a bad manager wasn’t necessarily a foolish decision, given the potential risks. “I think it was a rational decision by some investors not to pull on the GP in a declining market, because you might force them into fire sales and asset sales where your capital would have been eroded further,” he said.
Hason added that it was important for an investor to distinguish poor performance from poor behavior, and how declining markets may contribute to a poor performance. “Investing money is easy. Managing money is hard,” he said.