At some stage all parents have to accept the fateful day when their children will fly the nest. It is a fact of life and a law of nature, irrespective of species. Hughes In deciding how to incentivise a GP team it’s worth asking one question: is the current make-up of the GP team appropriate to face the challenges of today There is no one-size-fits-all-approach. Clifford Chance real estate fund formation partner Roger Singer
It is also a fact of finance, with firms continuously hiring, training, promoting and rewarding their professionals throughout their careers, often to see them later spread their wings by joining another firm or branching out on their own. During better economic days, such regeneration among the ranks could be spun in a positive light, allowing the firm the chance to renew itself with fresh blood and new ideas.
Few people, if any, are happy to work for little or no pay and it is an issue PERE has written about on numerous occasions. So how do GPs – and the limited partners in their funds – continue to incentivise the team, ensuring the platform can survive to fight another day?
One radical solution to have surfaced in the past month would see GPs and LPs agree to split an existing, partially or fully invested fund into two pools of assets – one containing the good deals and another containing the bad ones. Dividing a fund into a “good bank/bad bank” would have the benefit of allowing GPs and LPs to concentrate on those investments with the best chance of making a profit, and give the GP team the opportunity to earn carry on the better deals. It would also, of course, raise enormous questions, not least why an LP should reward a GP for failure. If LPs have to take the hit, so too should their GPs. To date the idea is just that, an idea – and it will likely remain so in the future.
and tomorrow? In essence, is the status quo actually necessary?
In both scenarios though it’s worth asking one question: is the current make-up of the GP team appropriate to face the challenges of today and tomorrow? In essence, is the status quo actually necessary?
What a fund requires at the start of its life from its key executives and wider GP staff is different to what it needs in the middle and at the end of its life. Add to that equation a global real estate recession and downward pressure on private equity real estate fundraising capabilities, and a GP’s team from five years ago may need a facelift to fit into the world of 2010 and beyond.
For Singer, the debate on team retention is an opportunity for investors – as well as fund sponsors – to think about exactly what they want from their GP staff. “There is no one-size-fits-all-approach,” he says. LPs should be focused on maximising value from today’s opportunities – and deciding the GP team best suited to execute those strategies.
It’s wise to remember, after all, that not all parents watch their children voluntarily leave the nest. Some also have to give them a push – which isn’t always gentle.
In deciding how to incentivise a GP team it’s worth asking one question: is the current make-up of the GP team appropriate to face the challenges of today
There is no one-size-fits-all-approach.
Clifford Chance real estate fund formation partner Roger Singer