It’s not a case of three strikes and you’re out, but it’s fairly close. As limited partners dig deeper for information about the investments in their portfolios, one US investor – Allstate Investments – has developed a risk rating index with which to judge the performance and relative risk of their GPs.
The $97.7 billion investment portfolio, which has a real estate portfolio worth more than $17 billion, including $2.5 billion in real
estate equity investments, introduced the performance rating system in the wake of the credit crisis last September. Real estate investment chief Edgar Alvarado said he wanted to know if there was a “ticking time bomb” in his real estate equity portfolio. “We need this information and we need this level of transparency if we are to do our jobs properly.”
Allstate’s performance-related matrix judges a GP against four risk factors, including vintage year risk; liquidity risk; organisational risk and transparency. Alvarado said as part of the system, Allstate has pushed GPs hard for increased reporting on – among other things – asset level leverage, debt covenants and maturities, debt extensions and service coverage ratios, counterparty risk, available dry powder and fund credit lines.
To the credit of our GPs, most understand the necessity of increasing transparency in this environment
Each quarter, he said, the real estate team produces a fund summary report providing highlights of the portfolio, the GP and significant events that may have taken place. Analysts also provide their view on the performance and risks associated with funds, together with their risk rating recommendation. A final rating is awarded following a team meeting debate and then tracked. “This allows us to start identifying funds that have higher relative risk to the rest of our portfolio,” Alvarado said. However, it’s not just about relying on GP information.
Despite having a staff of just six people, Alvarado sent his team out across the country in the first and second quarters to speak to brokers, property managers, leasing agents, and asset managers to boost their knowledge on their investments, property sectors, key markets where fund investments are concentrated and the underlying assumptions used by managers. “We have to come to our own informed viewpoint as well,” Alvarado said.
One example is in relation to the assumptions used by GPs. If Allstate has two GPs investing in offices in City A but one uses one set of assumptions and the other uses a different set, Alvarado said “we want to know why. If we can’t see the reasoning behind it we are going to push back against the GP.” Alvarado first tested part of the system – analysing fund debt maturities – at the start of 2008, but poor reception from a test sample of GPs forced Allstate to “back off” expanding the project further.
In the global fallout of September 2008, Alvarado said there was much greater success.Alvarado has increasingly pushed for greater disclosure since that time, with the staff holding quarterly calls with Allstate’s GPs, receiving financial statements within three months and providing GPs “significantly more disclosure.” “To the credit of our GPs, most understand the necessity of increasing transparency in this environment. However, I don’t want to take a step backwards in terms of the information LPs receive once we’re through this downturn,” Alvarado concluded. “We need to ensure we don’t go back to the ‘business as usual’ of the past few years.”