PREA: GPs should be ‘nervous’ about commingled fund model

Investing in a club structure, with a handful of like-minded investors, is preferable to the limited partnership model, according to a panel of large pension plans and sovereign wealth funds.

General partners should be “nervous” about the future of the commingled fund model, amid warnings large investors don’t want to be part of the blind pool structure for the foreseeable future.

A panel of large institutional investors at the annual PREA conference today hit out at the private equity real estate commingled model, insisting they would look to club structures in order to gain greater control and transparency from GPs.

People have to recognise the LP structure with 30, 40 or 100 players in it is very, very difficult.

Graeme Eadie, CPPIB

“The GP should be nervous because certainly the larger investors have all been frustrated with the limited partnership model and have been really focusing on how to exercise better control and how to put their interests first,” said Graeme Eadie, senior vice president of real estate investment at Canada’s CPP Investment Board.

Eadie said it was crucial real estate investors “engaged on the same level … giving direction to the GP and standing up for their rights” together. A club structure was the best format to do this through, adding: “People have to recognise the LP structure with 30, 40 or 100 players in it is very, very difficult”.

He was joined by Michael Carp, head of Americas investments at Singapore sovereign wealth fund GIC Real Estate, who said the indirect investment structure was “very difficult … right now.

“I used to think that direct [investing] was far harder but indirect is much more difficult,” Carp said. He said having multiple limited partners in a fund often made it impossible to work through problems and issues effectively.

Carp was joined by Guido Verhoef of PGGM, the asset management arm of Dutch pension PFZW, who said it was crucial large investors joined forces with “like-minded investors”.

“There should be a limited amount of like-minded investors, who can speak with one mouth to offer one solution [when there are problems]. It’s very inefficient to find a solution with 40 investors. It’s better to have club investments with five or six like-minded investors.”

The annual fall US Pension Real Estate Association conference also heard that the Foreign Investment in Real Property Tax Act (FIRPTA) of 1980 was proving an obstacle for many overseas investors, such as GIC Real Estate, from investing more capital in North American property.

The act imposes a withholding income tax on certain foreign investors selling real estate in the US. Carp said it was equivalent to a 50 percent tax rate for the sovereign wealth fund. The US would be the fund’s number one location in terms of real estate opportunities, he added, however “with the tax issue it moves it down [our priority list] … [FIRPTA] for us is the biggest impediment to investing in US real estate”.