EUROZONE: Investors must get tough

In the UK recently, it looked like a band of disgruntled backbench Labour members of parliament (MPs) would be able to force the resignation of prime minister Gordon Brown.

Robin Marriott

An email was circulated trying to corral enough names to sign up to the petition. Although everybody was very unhappy with him, the plan didn't work. A mass of Labour MPs believe Brown does not have what it takes to lead the country at this difficult time (much less win the next election), but they still couldn't actually co-ordinate an attempt to force him to leave office early and replace him with someone else.

What's this got to do with private equity real estate?

Well, just like the British MPs, many LPs don't have the confidence to face up to their GPs when they see something they don't like.

To this end, an anecdote told at the PERE Forum: Europe last month was not only a breath of fresh air, but it also held an important message for LPs who are looking for the courage to fight back against terms that do not align their interests well enough. The real estate head at London-based Fleming Family & Partners mentioned an Asia fund that wanted to extend the investment period to take advantage of new markets, as the GPs described it. Yet investors including Fleming Family & Partners said no to the proposed extension. Here was a coreplus fund changing its spots to a value-added/opportunistic animal. The LPs communicated with each other and voted against the investment period extension. The GP did not back down. It lost the motion.

Just like the British MPs, many LPs don't have the confidence to face up to their GPs when they see something they don't like.

The view taken here was that if a GP wants to take advantage of new markets they should raise a new fund, an exercise in re-invention managers of private funds must all go through every few years.

Private equity real estate needs LPs like those involved in the Asia example to keep GPs in line. Otherwise, you end up with a submissive herd of investors powerless to challenge the very people who owe them fiduciary duty.

At the PERE Forum, there was much debate about the future of closed-ended blind pool fund structures, with some suggesting that asset-by-asset deals are more favourable right now.

But the Asia example shows just why the oft-criticised blind pool LP approach to investing contains a very important safeguard feature. The clue is in the term “closed-ended”. Because each fund has a finite life, it means that a GP towards the end of the investment process has got to go back to his LPs and start the marketing process again if he wants to raise a new vehicle.

In some cases, however, GPs are evidently trying to short-cut the system by asking LPs to allow them to extend the fund because they see a good time to invest is coming. This kind of improvisation should be rightly examined and possibly stamped on.

If the GP in question really believed there was a great opportunity to invest new equity in a new strategy, he should take the customary approach by working hard, presenting the case to the spectrum of investors and raising a fresh vehicle.

The Asia example also shows that you don't have to be an investor writing big cheques for hundreds of millions of dollars to get your voice heard.

This is important as there is wide array of other GP manoeuvres presently going on that are not going down well with LPs, yet many don't seem to speak up. Some GPs have been conveniently ignoring the original fund prospectus written in different times and are now going after debt deals and workout situations. If this was the genuine strategy, it should have been spelled out in the original documentation, not drifted into because the time now suits.

At least some LPs are earning reputations for being proactive or for leading other LPs in discussions with GPs, and these are the kind of investors that should be praised at the moment.

need to be leaders in times like these, not just followers.

The Blackstone Group held a final close of Blackstone Real Estate Partners Europe III last month on €3.1 billion. No commitments have been made since an initial close last year. The initial target for the European vehicle was €2.5 billion.

Roger Orf, Citi Property Investors president, presented several silver linings at the PERE Forum: Europe held in London last month. Among those he highlighted were the fact that real estate fundamentals were generally in balance going into the downturn, $35.5 billion of equity had been committed to private equity real estate in 2008 and the level of distressed property would outweigh the level of demand.

Max Property Group, a closed-ended company backed by investors including New York-based hedge fund Och-Ziff Capital Management, has completed an IPO on London's junior stock market, raising £220 million (€252 million; $351 million).

Lugano, Switzerland-based M&A Property Investors has launched a €100 million fund to invest in property in Europe and North Africa. Swiss-Italian financier Marc Cottino is behind efforts to secure capital and invest it. He was previously with Millenium Capital.

London-based Mountgrange Investment Management has closed its debut vehicle on £300 million (€342 million; $475 million). Mountgrange Real Estate Opportunity Fund attracted more than 30 investors, including $30 million from the New York State Common Retirement Fund. Credit Suisse acted as placement agent.

Henderson Global Investors, a London-based group, has launched the Henderson Central London Office Fund II, targeting a total of £500 million (€359 million; $500 million). The firm said CLOF II would be structured as a seven-year absolute return, closed-ended fund designed to capitalise on the cyclicality of the central London office market.