FEATURE: Happy birthday PERE magazine

On 1 April, 2005, PERE was born. It was an auspicious moment in the history of the private real estate investing world, marking a time when capital, talent and the best ideas were migrating to blind-pool limited partnerships.

Blind-pool property vehicles were, as PERE’s editor-in-chief David Snow wrote in that very first issue “becoming the drivers of global real estate investment and asset transformation”.

Five years on, it’s clear to see the impact that blind-pool limited partnerships have had on the global real estate community.

Since 2005, almost $300 billion of capital has been raised globally by these vehicles as they targeted value-added and opportunistic equity strategies alone. That figure rises significantly when you take in account core and debt strategies. 2009 fundraising levels for blind-pool property vehicles may have been slashed to below 2005 levels, but it is impossible to ignore the importance of such real estate funds.  

When real estate professionals today talk about the “wall of capital” sitting on the sidelines of property markets worldwide, it is to these opportunistic funds that they are largely referring. And even when the fund model itself is being challenged by poor performance and alignment of interest conflicts, few, if any, professionals are actually predicting the death of the blind-pool.

Looking back five years on issue 1, volume 1 of PERE, it is easy to see how the industry has changed as blind-pool investing grew in volume and importance. However many of the issues first reported by PERE are still as relevant today as they were in 2005, from clawbacks to the inherent risks of choosing a fund manager. As Snow said in his editor’s letter: “We see the journal you now hold as our bet that real estate investing will become more and more difficult.” How true that prophecy has become.

Remember the clawback

As real estate markets globally experienced ever-rising valuations, few believed clawbacks would ever rear
their ugly heads

Clawbacks may have been a pretty rare occurrence in 2005, but five years on the mechanism that ensures GPs don’t receive an inappropriate share of the economics of the limited partnership are a hot topic of debate. The foundations though were laid back in 2005, when investors, sponsors and their lawyers introduced increasingly sophisticated clawback and profit-sharing structures in real estate funds.

Scott Landress, chief executive officer of secondaries firm Liquid Realty, said at the time: “The [private equity real estate] market started off with a deal-by-deal carry and no clawback; then it was deal-by-deal with a clawback; then it was a clawback and a reserve account; then it was return of capital model; and now, it’s return of capital with a slow catch-up.”

Few professionals interviewed by PERE in 2005 expected clawbacks to become as fashionable as they now are

Through a variety of different provisions – either simple clawbacks, rolling clawbacks or even claw-forwards – LPs and GPs set in place layers of protection intended to align the interests of the two sides. Few professionals interviewed by PERE in 2005 expected clawbacks to become as fashionable as they now are, yet as John Noell, partner at law firm Mayer Brown, said: “We’ll probably start hearing a lot more about clawbacks in the next 10 years.” April 2005, p. 2

Home sweet home

GPs were falling over themselves to get a piece of German-government owned residential properties.

With unemployment standing at 12.6 percent and GDP at just 1.6 percent, the Germany of 2005 was a country largely considered to be stuck in the doldrums. Yet, five years ago opportunity funds piled into non-performing loans backed by German residential assets, as well as large housing portfolios from German corporations or the government in the belief the nation would enter an era of prosperity.

Fortress Investment Group’s €3.5 billion purchase of 48,000 homes in Essen from BFA, the German state retirement agency, was one example in PERE’s feature.

At the time though, some professionals doubted whether opportunity funds would be able to make as much money as hoped, with The Carlyle Group’s managing director, Wulf Meinel, saying at the time: “All the firms investing operate out of places like London or New York. They see rents of €3 to €5 per square metre per month and they can’t believe it; they think there must be an upside there. But that’s market standards – there are limits on how much you can raise them.”

For Fortress, the Gagfah housing portfolio has since became an infamous deal, after the firm was forced to ask existing LPs in Fortress Fund III to inject additional capital to pay down debt on Gagfah and other deals in the vehicle. April 2005, p. 30