On 2 December, 2009, Wes Edens, co-founder of Fortress Investment Group, walked into the Oregon Investment Council for a candid conversation about the performance of his funds. The discussion, he knew, would be a tough one.
The US public pension had committed more than $300 million to the firm’s vehicles since 2002 and, after Lone Star, Fortress was Oregon’s largest opportunistic real estate exposure. But, like most private equity and real estate funds, Fortress’ performance was taking a hit. Indeed, the firm’s $5 billion Fortress Investment Fund V, closed in 2007, was at the time projecting a 0.44x multiple.
So when Partners Group chief strategist for private real estate and Oregon’s consultant Nori Gerardo Lietz challenged Edens over whether Fortress could ever return the pension’s investment “100 cents on the dollar”, Edens admitted that 2007 was going to be “a pretty miserable vintage analysis” for the entire industry. Fortress was still targeting 20 percent IRRs and a 2x multiple for Funds II, III and IV, he stressed, but for Fund V “it’s not likely you’ll make two times your money. I’m crazed about it.”
This private conversation between LP, GP and consultant surfaced into the public consciousness because of a growing trend among US pensions to increase transparency into their operations – and investments.
In Oregon’s case, an audio recording of the investment council’s board meeting was made available upon request. Oregon though is not alone in opening its doors to greater public scrutiny. Last month, the $94 billion Teachers’ Retirement System of Texas started webcasting its full board meetings – although not its investment management committee sessions – so that, as TRS board chairman David Kelly said, retirees could have a “front row seat” to decisions made “no matter where [they] live in Texas or, for that matter, the world”.
In an industry that often regards state funds as lumbering, bureaucratic machines, US public pensions have eagerly – and quickly – utilised 21st century technology to make their activities as transparent as possible.
|  In an industry that often regards state funds as lumbering, bureaucratic machines, US public pensions have eagerly – and quickly – utilised 21st century technology to make their activities as transparent as possible.
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Texas, for instance, joins an impressive – and influential – list of institutional investors that are, in one format or another, making their board and committee meetings available to anyone with a computer and a telephone. The $138.6 billion California State Teachers’ Retirement System and $113.5 billion Florida State Investment Board both stream live audio of board and investment committee meetings over the internet, while the $198.3 billion California Public Employees Retirement System provides a live dial-in telephone number where members of the public can listen in.
The list is longer than most GPs would dare to imagine and in some cases, not least TRS’, a televised webcast is available on-demand.
Public advocates would argue this level of transparency is essential considering the sheer scale of write downs suffered by LPs over the past two years. Yet for GPs – and their lawyers – this unprecedented amount of disclosure by investors presents several challenges.
The first, of course, is Regulation D – the Securities and Exchange Commission’s rule which prohibits private equity real estate fund managers from selling “securities by any form of general solicitation or general advertising”. We’ll leave it to the lawyers to determine whether an LP-initiated broadcast of a real estate fund pitch counts as general solicitation.
| By being one of those fund managers that openly and honestly communicates with its LPs – and is publicly seen to be doing so – a GP can boost his or her reputational standing with a vast gamut of investors at the click of a button. |
The second relates to the confidential nature of a GP’s strategy, and whether in presenting a prospective investor with a PPM and talking through their best ideas, a GP is opening themselves up to plagiarism by rivals.
The third, and undoubtedly the most important issue, however, relates to human behaviour. In knowing they are being recorded, will a GP ever be truly frank, open and honest with LPs about their fund, investments and strategy? Will fund managers being webcast talk candidly about their investment prospects, and once a commitment is made, debate unreservedly with LPs the opportunities and challenges they face? Or will GPs put on a show knowing only too well the public, media and competition is watching?
Real estate GPs worth their salt should actually see the increasingly open nature of their business as an opportunity to set themselves apart from the rest of the crowd, rather than an assault on a private industry.
By being one of those fund managers that openly and honestly communicates with its LPs – and is publicly seen to be doing so – a GP can boost his or her reputational standing with a vast gamut of investors at the click of a button. In a world where real estate dollars are hard to come by, what more could a GP ask for?
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