EUROZONE: Fund of funds vs. consultants

Robin Marriott

When things are going well, one can cope with life’s annoyances: the train running late or the kids screaming in the background when an important call comes through on the mobile. But when things are not going so well, suddenly the small things become even more worrisome and harder to take.

Some real estate fund of fund managers are experiencing just such emotions as they currently evaluate their relationship with investment consultants.

In good times, fund of funds managers wouldn’t be peppery about consultants, often meeting them in search of capital commitments and their capacity as asset allocators.

In recent months, though, there have been complaints about consultants’ ability to actually divert business away from the multi-manager space.

Fund of funds managers need consultants to progress their own business, but don’t want to give away their proprietary edge

The source of discord relates to two issues. One is the need to provide consultants with detailed strategies about fund investments in the hope of securing a commitment from the consultant’s clients. If a commitment isn’t forthcoming, fund of funds managers may feel they have offered up their best ideas, which can then be used by consultants to provide multi manager advice about the GP in question to clients.

The second – and perhaps more controversial issue – is when consultants also sponsor their own fund of funds, or act as investment advisers to third-party multi manager programmes.

One fund of funds sponsor, who spoke to PERE on condition of anonymity, said some generalist consultants were positioning themselves as a “de facto fund of funds”, claiming they could do underlying fund selection as well as any other multi-manager. “In both cases their clients are deprived from access to a much larger talent pool,” he said.

There are two implied criticisms here. One, that some generalist investment consultants can’t do the job of manager selection as well as a niche fund of funds. Two, that consultants are unable to provide impartial manager selection advice – on a whole universe of real estate managers – if they operate a fund of funds themselves.

To get a sense of the size of the potential issue, PERE asked one senior real estate professional in Europe his thoughts. “I understand one or two consultants have provoked discord amongst the multi-managers by establishing their own manager selection platforms, diverting business away from the multi-managers toward their own offer,” he said. “The multi-managers would say they are conflicted in adopting such business practices, but then rely on the consultants for business so rarely speak out.”

It is hard to gauge if this is just trash talk or if the fund of funds managers are onto something. There are certainly UK generalist consultants staffing up in this area, and also a large US-based specialist real estate global consultant out there pitching on mandates and considering a fund of funds platform in Europe.

It’s an issue that warrants further examination, but personally speaking, the capability and experience of the investment consultant matters a lot here.

So long as the investment consultant has the capacity to do its own homework on the full spectrum of fund offerings, and so long as the consultant acts in the best interest of the client, there shouldn’t be any issues. Of course, all clients should be made aware of any potential conflicts of interest.

As one global consultant contacted by PERE said, if a firm has a large research capacity it can make both direct manager selections and fund of funds selection. “With conflicts, perceived or otherwise, the best way to deal with these is with transparency.”

The consultancy added: “If a fund of funds manager decides they do not want us to research them in case we see their best ideas that could be used in direct searches then we completely understand. It is just that we will not be able to put them forward for business for those clients that want a fund of funds.”

And therein lies the rub. Fund of funds managers need consultants to progress their own business, but don’t want to give away their proprietary edge. Unfortunately, for the multi-manager this is one of life’s annoying things that needs to be endured.

But with a bit of luck, and if the market continues to improve, perhaps it won’t hurt so much in future.