The first-ever PERE Global Investor Forum took place on 20 and 21 September in Amsterdam, where there was a real buzz.
No one could quite work out whether that was because of the line-up of speakers, the blend of different types of people among the delegates, the networking session on the morning of Day One or perhaps the city itself. Yet, by the end of the first day, there were plenty of smiles, banter and general bonhomie.
Conferences aren’t always like this. Getting a place to swing is the elixir of the conference circuit. However, one thing was for sure: the spirit wasn’t the result of some of the points made by the keynote speaker.
Nori Gerardo Lietz doesn’t pull punches, and she doesn’t do ‘nice’ for the sake of it. Having told delegates that Blackberries would be confiscated if looked at, the predominantly male audience promptly went into schoolboy mode, making sure not to upset teacher. Indeed, Lietz is a senior lecturer at Harvard Business School and recently formed Areté Capital after previously serving as partner and chief strategist at Partners Group.
As she paced the stage (she doesn’t like to be shackled), Lietz told it the way she saw it. To be fair, though, a lot of the punch she delivered with the points she made likely is lost here in type.
Lietz’s first observation was that multiples on cap rates in big urban areas have been driven down to where they were at the peak of the market. “’How stupid is that?” she asked. “If one is buying something at a 3 percent cap rate with economic growth rates that effectively are 1 percent, it is a directional bet on interest rates,” she explained, adding that she always was taught that was pretty risky. Still, everyone is doing it.
In a rhetorical question, Lietz asked: “How hard has it been for people in this room to raise capital for strategies perceived as risky?” Still, that is exactly what investors should be targeting if they want to make money, she advised.
Another warning light over the current investing climate was that sovereign wealth funds – or überfunds, as Lietz called them – have become competitors to fund managers. However, she noted that, if one followed the Australian superannuation funds in the way they have gone in and out of commingled funds throughout time, maybe the trend among sovereign wealth funds to do things for themselves won’t last forever either.
For their part, the large US pension plans are doing separate accounts and the next category down are dipping their toes in formats other than co-investment. In addition, Lietz said everyone should be praying that the equity markets recover soon because the denominator effect means many funds are over-allocated to real estate.
Lietz also questioned the decision of large firms such as The Blackstone Group, The Carlyle Group, Fortress Investment Group and Oaktree Capital Management to go public. “In order to do what? To replicate the exact same thing as the investment banking model?” she asked. “The question for investors is whether the business model is any different to the previous strategy that clearly failed.”
Next in Lietz’s wide-ranging discourse was the shift from defined benefit plans to defined contribution plans, as employers moved their risk to employees. “They are going to have to say over the next five years that they really cannot make anymore private equity or private equity real estate investment,” she said. At the same time, the shift to defined contribution schemes will end in a massive consolidation of power within the consultant community – picking out Peter Lewis from Towers Watson in the audience – because they are going to be the beneficiaries of outsourced management.
That is the problem for the smaller real estate fund manager: to get their name on the list of the consultant. The mid-size funds, meanwhile, could be in a very difficult situation because they could get squeezed out by the large funds and lose out to the small specialised funds.
Mercifully, as much as I enjoyed Lietz’s presentation, the panel discussion that followed her was a tonic. The three limited partners – Bouwinvest, Allianz and TKP Investments – and Kurt Roeloffs, global chief investment officer at RREEF, did much to hearten fund managers. Despite being more risk-adverse, they are making investments in property funds and looked favourably upon real estate as an asset class.
Plenty of investors are under-allocated, while some überfunds have realised that the world is very big and they want to invest now, said Roeloffs, citing the China Investment Corporation as a client. They want to do deals directly, but they also want to invest through funds. In other words, they are very pragmatic.
Roeloffs noted that one of the big prizes that no one had conquered yet was how to take a higher-risk strategy like private equity real estate and apply it to defined contribution schemes. “That is going to be a very big prize at some point as those funds get scaled up in size and as they do more real estate investment,” he said.
With talk of prizes and European investors making commitments, perhaps that is why there was an upbeat mood at the PERE Global Investor Forum, despite the warning lights.