NEWS ANALYSIS: The customers are right

Real estate fund investing has been a rollercoaster ride for LPs in recent years with more downs than ups. To ensure that future rides run smoother, some GPs in Asia are revising elements of their fund fee structures to entice investors back on board. 

Singapore-based Pacific Star and Hong Kong-based Harvest Capital Partners have both recently returned to the drawing board in order to offer their investors a more approachable vehicle.

Pacific Star launched its Asia Fund Select last year having devised its fee structure in 2007. After failing to corral capital commitments in its original guise, Pacific Star president Frank-Rainer Vaessen saw the need to restructure how the firm gets paid ahead of a first close, expected to be between $300 million and $500 million and anticipated before the end of the year. Last month, Vaessen started implementing the changes. 

“Investors told us the fund was well received but some said they had problems with our front-ended performance fees provision and the notion of unrealised capital gains,” he said. 

To address the issue, Pacific Star has switched to what Vaessen coined as a “back-ended fee structure” whereby the firm would receive its share of the fund’s performance proceeds above an agreed hurdle once the investor divests his units. Vaessen said this would represent a departure from the firm’s more traditional structure whereby it would receive an annual sum, albeit while offering investors a “claw-back provision” should the firm be overpaid. “This is simply a result of speaking with our investors. If we don’t adjust, we won’t be successful.” 

Vaessen said that fees on committed capital would remain but noted that the firm would also allow investors to see its deal pipeline once they have entered the due diligence stage of negotiations to commit to the fund. Vaessen said they would need to sign a confidentiality commitment to see the pipeline but that this should be regarded a further incentive. “In today’s market you can’t convince investors into a blind pool. They want to see your pipeline and how secure it is as well as how fast you can invest the committed capital.”

George Agethen, Harvest Capital’s newly appointed head of capital raising and business development, is also revising his firm’s fee structure to be more performance-related on its incoming fund.  

Having joined the firm from Australian bank Macquarie last month, Agethen has been working on a new vehicle penned to come to market before year-end. The firm had garnered $200 million in commitments in April last year for a successor vehicle to its $350 million China Real Estate Opportunistic Fund, including from seed investors China Resources and London-based real estate firm Liberty International. 

However the firm opted to cancel the vehicle earlier this year and devise another effort instead. “There was no point in bringing out a 2007/2008 product when things have changed so much,” he said. 

Any new vehicle is likely to ensure proceeds post-hurdle are paid at the end of the funds life to be in line with performance. Agethen said: “The industry has seen what happens when carry gets paid and suddenly managers are out of money – the investor does not get the best out of him.” 

Harvest Capital is also examining the prospect of offering in investment decision-making powers to investors, another popular item tabled by managers of incoming funds. 

Both firms are hoping these measures will do the trick and entice investors back on the ride.