We’re at a point in the market cycle when it has become fashionable to ‘cut out the middle man’. Indeed, some investors are taking radical steps to switch their modus operandi toward more direct responsibility for investments, while some managers are switching theirs to taking on more operational or development responsibilities. Whether it is a quest to become omni-capable or simply to cut ‘unnecessary’ costs, brokers, allocators and other facilitators are often the ones losing out.
However, there is one group of ‘middle men’ that should remain an important component to any fund manager bent on taking its latest private placement memorandum out on the capital-raising circuit. That group is the investment consultant: The Townsend Group, Cambridge Associates, Russell Investments, Towers Watson, Mercer and others – you know the names.
Over the coming months, some of these consultants are likely to figure in a beauty parade held by Korea’s pre-eminent state fund, the National Pension Service (NPS) of Korea. These firms will jostle for a mandate to recommend two opportunity funds in North America, Latin America or Asia, to which the $288 billion state fund would commit capital from its copious resources. If NPS’ slated $300 million commitment to the latest opportunity fund of New York powerhouse The Blackstone Group is anything to go by, the size of these commitments should be meaningful.
|  Be prepared to spend serious time with these people as they craft a voluminous dossier on your firm for circulation around their networks
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Last time PERE looked, NPS only had a handful of professionals scouring the planet for investments that would add $1.5 billion to $2 billion per year to its $6 billion of global real estate assets outside Korea. With 85 percent of that in the core space, transactions completed via investment clubs or non-discretionary separate accounts must give way to traditional funds if the pension is going to bolster its higher-return exposure. With the best will in the world, that isn’t possible without fund managers. Rather than permit a queue of managers to materialise outside its Gangnam-gu headquarters, they are, rightly, turning to an investment consultant for help.
One Hong Kong-based GP recently recounted to PERE just how additive making it onto the ‘recommended list’ of one of the aforementioned consultants was. Once approved, this GP was granted forums with prospective investors it would not likely have been able to meet otherwise – one sizeable second closing commitment from a Saudi Arabian investor springs to mind, and he expects that commitment to induce more.
One word of caution: getting past ‘level one due diligence’, as it was described, is no child’s play. After creating a rapport with the consultant, this GP was subjected to a vigorous scrutiny ranging from predictable examinations of transaction underwriting, risk analysis and market understanding to perhaps more spooky personal and family investigations for those executives stipulated as ‘key men’. Described as ‘lengthy’ and ‘very detailed’, be prepared to spend serious time with these people as they craft a voluminous dossier on your firm for circulation around their networks.
The GP in this instance said his entire ‘history was combed’, but he understood how comprehensive the process needs to be, particularly these days as the markets recover from arguably less scrutinised decisions taken in the immediate past. Indeed, he too adopts similar tactics when evaluating his business partners. Sounds creepy in one respect, but when you consider the ultimate source of the capital, pension funds for example, don’t their constituents deserve such a service? Of course they do.
Furthermore, these measures don’t just help mitigate the risk of partnering with inferior organisations, they also offer protection against situations both scandalous and potentially criminal. Indeed, institutional investors that use consultants add a layer of insurance to their due diligence. Finally, it’s important to underline that, while some consultants also run their own investment management businesses, the consultancy services they provide to their clients cost the GP nothing.
Of course, making it on to the ‘recommended list’ of a consultant doesn’t guarantee a cheque in the GP’s hand, but it won’t hurt either. In fact, it would go a long way to helping such a commitment to materialise. In the current capital-raising environment – PERE’s 2011 total for value-added and opportunity funds in Asia was little more than $4 billion – endorsements like these are bona fide for sure.
PERE asked the GP what advice he would give others in terms of how to be included in a consultant’s stable of top managers. His response: be the best in class. A predictable response perhaps, but that doesn’t make it wrong.
Private equity real estate is not a game fixed on impressing consultants. Moreover, if a firm’s underwriting, risk analysis, market understanding, systems, processes and so on are indeed ‘best-in-class’, capital should come. Of course, part of any firm’s market understanding is knowing which groups need to experience what you have to offer firsthand. In a time when middle men are under fire, the attentions of these particular middle men most definitely warrants courting.
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