EUROZONE: Real doubts

“Lots of people are struggling to understand what their future looks like.” That is probably the most succinct statement to have been made regarding private real estate merger and acquisition activity, let alone the state of the industry, in the past few weeks.

The question posed was which firms – other than RREEF – are up for sale, and the answer came back that, as far as this general partner was concerned, there apparently were no “explicit” sales that he was aware of. The statement observing how lots of folk were struggling to see what their future looks like was followed by an observation that there currently are plenty of people in touch with headhunters trying to work out their next move. It seems headhunters are the new arrangers.

Having had several conversations recently with limited partners invested in opportunistic funds, it is apparent that the capital side of the equation also is not providing much clarity to those facing an uncertain future. The ones I swapped notes with seem to have hit a gigantic pause button, preventing significant commitments to European real estate opportunity funds. Real estate investment professionals appear to have bosses inside the global framework of the institutions that have asked for something akin to a moratorium on making commitments while they wait to see if Greece has any friends. One global investor said “nervousness” had re-entered the market.

I sense that fund managers that need to raise their next fund are feeling this nervousness in just about every meeting taking place with an LP – existing or prospective. One general partner said: “The view of Europe from America has taken a distinct turn for the ‘let’s wait to see greater clarity in a few months’ approach given the anticipated, and now realised, election results in France and Greece.” The manager in question added: “I have heard from several European LPs recently that their investment committees have instructed them to focus on lower-risk deals that provide good, higher-yielding income returns.”

The difficulty in gaining commitments means that firms are indeed struggling to understand what their future looks like. The pan-European manager quoted above explained that his shop is being pressured to think creatively as a result. Maybe the answer is not to raise a classic fund, but to team up with one big-ticket backer, almost like a separate account from an institutional investor. Of course, the major issue there is mostly management-related. Such groups in this position reasonably want final discretion and exclusivity, or at least first refusal. So before hitching one’s wagon to such a star, the manager needs to ask itself: does it have confidence in the investor’s decision-making ability and are the respective investment approaches of both parties consistent? As everyone knows, in this business, gaining mutual confidence in this area is not so easy.

Fund commitments aside, there is something else that is causing the future to be uncertain – regulation. I am sensing real unease, and possibly alarm, that a generation of fund managers could be lost the way things are going. The tendency once might have been to dismiss this as hyperbole, but one cannot be so sure today.
As reported on page 22, fund administrators that specialise in helping first-time funds are questioning the future direction of the industry – and dare I say – struggling to understand what their own future may look like. Fund administrators, after all, operate at the grass-roots level, by which I mean the early-stage organisation of firms that are seeking to start their first fund or maybe their second.

Of particular potential toxic quality to such firms is the forthcoming Alternative Investment Fund Managers directive, which comes into force in July 2013. There is an argument that smaller private equity real estate fund managers are in a worse situation than their brethren in mainstream private equity because of the way the directive treats fund-level gearing.
It is hard to say if the scope and associated costs of the directive definitely will accelerate the drying up of the pipeline of these smaller fund managers, but there is at least a possibility and a convincing case for saying so. It also could be potentially damaging for investors if they should lose a class of fund manager, as that eventually limits the scope of investment in a whole part of an asset class. Ultimately, it will hurt the underlying investors that entrust their money to that institution, namely pension holders and the like.

I probably should also mention my own interest in the debate. Potentially, the fewer fund managers there are, the less there might be for someone like to me write about. It might mean PERE will be writing a lot more about just a few firms, which doesn’t feel like something to necessarily relish. Who doesn’t like diversity?

As we arrive in June, the statement that lots of people are struggling to understand what their future looks like can be answered optimistically: “Let’s just hope that there is a future.” The Greeks would probably agree.