Listen in on any of the panels at the PERE Global Investor Forum in Los Angeles last month, and chances are the desires of private equity real estate investors were being heard loud and clear.
It’s evident that investors still are making control a priority when placing capital with a manager, and many favor doing so through separate account structures, as demonstrated by a panel featuring the California Public Employees’ Retirement System (CalPERS) and the Los Angeles County Employees Retirement Association (LACERA). The two pension plans, however, had differing views on co-investments by the general partner.
Jim Hurley, senior portfolio manager at CalPERS, said co-investments were part of a comprehensive approach to achieving alignment of interest. However, John McClelland, principal investment officer of real estate at LACERA, countered: “If I need their money to give me confidence that they’re going to do the right thing for me, then I have the wrong manager. Fundamentally, I need to trust the manager. When we lose trust, our relationship’s over.”
Trust is indeed a significant, and perhaps somewhat overlooked, issue in the industry. “There’s manager Darwinism that takes place,” said Stephen Hansen, managing director at Clarion Partners, on another panel. It’s not just track record, but trust and confidence levels that are important, he noted.
Among smaller investors, the most prominent request was to receive the same treatment as large institutions. Indeed, many such investors are investing alongside their larger brethren and receiving the same terms, with some even given a seat on the manager’s board.
Of course, not every wish gets granted. Roy Schneiderman, principal at Bard Consulting, noted that some clients have asked for the wrong individuals when making key man requests – meaning that they would request individuals who were the most senior or with whom they were most familiar, rather than the people who were most important to executing the vehicle’s strategy. In other cases, the clients are seeking a level of control over financing or timing of sales that isn’t possible with commingled funds.
In today’s capital-constrained fundraising environment, investors are getting what they want more often than not. However, as a number of panelists made clear, they still need to be careful in considering the potential consequences of their wishes.