When it comes to measuring a private real estate manager’s success, few areas are scrutinized as closely as the firm’s track record.
Performance data, however, are not easy to come by, as most fund managers are not required or incentivized to publicize their returns. One of the few publicly available sources are the firms’ limited partners, particularly US pension plans, which report such information either through mandatory public disclosures or to trade groups.
In theory, these methods can provide a snapshot of how well managers are executing their funds’ strategies. In practice, however, investors can sometimes measure performance in ways so disparate from one another that the resulting data ultimately shed little light on how strong a firm’s track record actually is.
Private real estate needs a more uniform system of tracking returns to more accurately gauge a manager’s performance.
Take, for example, Rockpoint Group’s Growth and Income Fund III. As PERE reported this week, the fund raised more than $1 billion in its first close and is understood to be targeting an 8-9 percent internal rate of return and a multiple of 1.8-1.9x after a long hold. To evaluate the vehicle’s likelihood for success, one might reference the performance of its series predecessor. Rockpoint Growth and Income II counts several pension funds among its investors, including the Public Employee Retirement Association of New Mexico, which committed $75 million and reported a 25.5 percent net IRR and a multiple of 1.18x at the end of September 2018.
A prospective RGI III investor might be wowed by the outsized return reported by PERA, although the multiple falls below target. However, should that investor look at the return reported by the Indiana Public Retirement System, they might be more confused than enthused. INPRS, which committed $50 million to RGI II, tracked a net IRR of 8.94 percent and a multiple of 1.06x through the end of the third quarter. While the return falls within the target range, RGI II, by INPRS’ calculations, is not knocking it out of the ballpark as one might infer from the PERA data.
For the record, both PERA and INPRS confirmed the accuracy of their data to PERE this week.
How could such widely divergent returns both be accurate? While most investors use the same terms when discussing performance – IRR and investment multiple – they do not, necessarily, share common definitions or methods of calculation.
These differing and, at times, conflicting means of tracking performance bring further murkiness to a market already lacking transparency. Investors evaluating potential fund commitments may therefore lack the data to make well-informed investment decisions.
The inconsistency of performance data has been already been recognized as a concern in the industry, with leading trade associations working to tackle the issue.
NCREIF PREA Reporting Standards, a joint initiative by the National Council for Real Estate Investment Fiduciaries and the Pension Real Estate Association, has sought to establish common definitions for return metrics and encouraged investors to provide additional context when reporting, so even if their numbers differ from other limited partners, at least it will be clear why.
The effort has made significant in-roads with open-end core funds and PERE understands that the initiative aims to do the same with closed-end vehicles soon. The aim is to provide “information that is clear, concise and comparable so stakeholders – particularly investors – can make informed decisions,” Marybeth Kronenwetter, the program’s director, tells PERE.
It is a laudable goal and one we should all get behind.
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