You'll read a lot about the importance of people in this, the June issue of PERE. But here's the bottom line on the topic – true investment talent is rare and comes with a hefty price tag.
This is good news for those talented investors thinking about their next moves. As you'll see in our special report on emerging managers, called “The Young and the Restless” (p. 31), the private equity real estate industry is going through a wave of spin-outs, whereby GPs who cut their teeth at established firms are creating their own enduring fund-management franchises. Investors aware of the individual track records of these GPs are richly rewarding them with capital commitments.
The high cost of top talent is not all good news for people trying to build their own firms. As you'll read in Eva Poon's article on terms and conditions within general partnerships (p. 46), founding partners need to carefully structure the sharing of economics and the alignment of interest within the firm or risk years of instability and turnover. Based on the velocity of spin-outs in recent years, it seems that no amount of money or equity can keep an ambitious GP in place when the prospect of raising his or her own fund looms so large.
As the private equity real estate industry matures beyond its opportunity-fund origins, it is in one key aspect beginning to look like any other industry. There are a clutch of very large, dominant firms at the top and a proliferating, endlessly-churning collection of small players at the bottom who target every conceivable niche.
Last month we unveiled the PERE 30, our proprietary ranking of the largest private equity real estate firms. Barring a disaster of Enron or Bear Stearns proportions, you can expect the likes of Blackstone and Morgan Stanley to continue growing at disproportionate rates.
However, as you can see from our “young and restless” profiles, the market is big enough, and growing fast enough, to support the creation of a new crop of firms. Frankly, we had a hard time narrowing down our selection of 10 emerging managers because so many interesting new groups were recommended to us. In this particular feature, we have profiled firms that could very well become quite large. But there are in the market today, and will continue to be, innumerable emerging managers who are targeting smaller properties, in smaller markets, using niche strategies.
And most of these firms are created at the expense of larger, established ones that have to go out and raid somebody else's firm for talent. If nothing else, it's a great time to be a headhunter in the real estate biz.
Enjoy the issue,
David Snow David.email@example.com