ASIAVIEW: Aligning the stars

Real estate is often referred to as a people business. So, it makes sense that individual fund managers in the sector put their money where their mouths are by committing significant capital to the vehicles they promote.

One new institutional entrant to opportunity real estate investment management in Asia believes in this principle to the degree that it will, for its debut vehicle at least, leave the mantle of GP co-investment solely in the hands of the staff actually running the platform, rather than meet the costs from its own balance sheet.

In asking its managers to meet the financial commitment of its management platform, DTZ Investment Management (DTZ IM) hopes to convey an appropriate enough alignment of interest with prospective investors. DTZ’s decision marks a departure for the firm’s new head of investment management Asia Pacific, David Schaefer. As the former Asia Pacific head of Citi Property Investors, Schaefer’s last company was turbo charged with sizeable sponsor commitments, matched by comparatively small co-investments from senior executives.

In Schaefer, DTZ IM will be led by someone knowledgeable about managing bank-sponsored mega-funds.

In Schaefer, DTZ IM will be led by someone knowledgeable about managing bank-sponsored mega-funds. PERE understands during early exchanges between Schaefer and DTZ’s global head of capital markets, Serkan Bektas, that Schaefer underlined the need for individual management co-investment, over any balance sheet investment from DTZ, although the sponsor may invest in subsequent funds.

In ensuring its fund managers put a significant amount of their own skin in the game, DTZ IM hopes to demonstrate its executives are as aligned with the investors they represent as any GP from a non-institutional platform. After all, when an institutional GP also makes sizeable capital commitments from its balance sheet into a fund, things can become problematic, as in the case of Schaefer’s previous firm, CPI.

In investing 15 percent of the $1.29 billion CPI Capital Partners Asia Pacific, Citigroup effectively became one of the largest LPs in the vehicle. However when the bank came under pressure to exit the business in order to strengthen its balance sheet, Citigroup’s position as a co-investor became a hurdle for LPs when a replacement sponsor was needed. Here you had an LP that was, for all intents and purposes, also the GP co-deciding the fund’s future. This was something no side expected to contend with when CPI launched six years ago, and was part of the reason why the sale process dragged on towards the end.

Of course this issue was not limited to CPI. Merrill Lynch is another example of a bank-sponsored GP making significant co-investment in a fund. In Merrill Lynch’s case it invested up to $700 million of the $2.65 billion of equity raised for its Merrill Lynch Asia Real Estate Asia Opportunity Fund, also placed on the market for sale. Merrill Lynch has since frozen the sale of its Asia real estate platform, as owner Bank of America evaluates its options against the backdrop of a rising market.

In allowing its senior management team to put their money where their investment mouths are though, DTZ hopes to avoid some of the traditional conflicts of interest of balance sheet investinge

But should institutional sponsors leave GP co-investments entirely to individuals? PERE questioned various fund advisors for their views. One advisor had experienced LPs requiring GPs to allocate up to 25 percent of a fund’s equity to feel comfortable. Another said LPs just want meaningful co-investment and are unconcerned whether it comes from the sponsor or its star players. “In some cases, the executives basically are the firm so in reality there is no difference,” he said.

DTZ Investment Management is certainly no investment bank and a glance at the parent company’s market capitalisation is indicative of the sort of balance sheet capital currently available for opportunistic real estate investment management fund commitments. Last month, DTZ’s market cap was £199.8 million (€221 million; $300 million), less than Citigroup’s GP co-investment capital in CPI Capital Partners Asia Pacific, casting doubt on whether it could even begin to invest significant amounts from its balance sheet.

In allowing its senior management team to put their money where their investment mouths are though, DTZ hopes to avoid some of the traditional conflicts of interest of balance sheet investing. If Schaefer’s management team co-invests even half a percent of the $300 million to $500 million it hopes to raise for its debut fund, the GP co-investment would still be $2.5 million. Investment managers can be extremely well paid, but how many people are actually willing to walk away from such a sum?