AMERICAS NEWS: Managerial opportunities

f there is one overriding question facing investors today, it has to be ‘Who do I invest with going forward’? It’s a question not just taxing the minds of limited partners across the US, but also Claudia Faust and Scott McArtor of Hawkeye Partners.

Set up in 2004, the Austin-based firm targets new managers to help establish and grow their real estate investment platforms. To date, Hawkeye has provided investment capital to four new managers through its $700 million Scout Fund I including Jeff Kaplan’s Meadow Partners and Garrison Investment Group, originally founded by former Fortress Investment Group executives Steve Stuart and Joe Tansey.

Hawkeye hopes to launch a second vehicle, Scout Fund II, at the start of 2010 with the hope of ultimately investing with another four to six new managers.

For Faust and McArtor though, it’s not just about investing money with a new operation – and with the aim of investing $100 million to $200 million in each manager, the capital commitments are a sizeable amount. Indeed, the pair said it’s also about “right-sizing” the capital for the operation and opportunity at hand.

The quickest way to blow yourself up is to get more money than you can responsibly deploy

Claudia Faust

The industry got lost along the way,” said McArtor. “If there is a $400 million opportunity, the opportunity doesn’t get larger just because investors are willing to give you more money. At the height some funds got too much capital and it changed the way they invested.” As Faust added: “The quickest way to blow yourself up is to get more money than you can responsibly deploy.”

After raising its first fund in 2007, with the backing of eight large institutional investors, Hawkeye vetted more than 300 “new” managers, selecting four for investment capital. McArtor said the investors take limited or no “equity risk” investing in the GP-entity, but achieve returns through the real estate and a minority share in the firm, which the new manager can buy back at a later date. However, Faust added, the firm does underwrite each deal as though it were an equity risk, not least because Hawkeye’s own investors will invest directly with the new managers in the future.

“You really have to dig very deep as you need to find out who they really are, do they understand risk, what motivates them, and do they have legacy issues – it’s a long but critical process,” Faust said.

Hawkeye doesn’t just invest with fund manager spin-outs, such as Meadow – it has also invested with  Panattoni Development Company and Alliance Residential Company, two developer/operators which have since started investment platforms. “That’s when it’s not just about infrastructure, but operating as a fiduciary, ensuring there is an economic alignment of interests and learning how to manage portfolios rather than one-off investments,” Faust said.

For Fund II, McArtor said the firm has a good understanding of where the new investments could be made – and with whom – with the hotel and debt sectors two areas Hawkeye would look to. “A few years ago everyone thought they could be a fund manager but they had very unrealistic expectations,” said McArtor. “We are getting back to the basics of real estate investing and as part of that process there will be some changing of the guard.”