AMERICAS NEWS: The direct approach

When a real estate investment firm recruits two top industry professionals in the space of two months, it typically signals a major transition at the firm. 
Such was the case with AVP Advisors, which brought on Suzanne West, the co-founder of Park Madison Partners, a New York-based placement agent, as a managing principal in August. Two months later, Eliza Bailey, the former head of real estate debt at Partners Group, joined as the fourth managing principal.
The reshuffling of the senior leadership team at the firm – which also includes managing principals Barry Chase and Amy Ko – has coincided with the launch of its new investment vehicle, the follow-up to its $400 million debut commingled fund in 2006. “We needed to add to our senior staff in order to really be effective in executing our new strategy of investing through programmatic joint ventures rather than funds,” said Chase. 
While Chase, West and Bailey all will be involved in sourcing, underwriting, asset management and mentoring of emerging managers, West additionally will be the primary capital raiser for the vehicle. Meanwhile, both West and Bailey will be utilizing their prior previous work with emerging managers to advance the firm’s new investment strategy of investing in local operating partners through joint ventures.
“Our first vehicle was a fund-of-funds, so we really didn’t have control over investment decisions, we didn’t have control over major decisions,” said Chase, explaining the strategy shift. “Under our new programmatic JV structure, we’re going to really have more of an opportunity to really be able to mentor and guide.”
AVP, which previously backed groups such as Exeter Property Group and Abacus Capital Group, declined to provide specifics on the fund, but PERE understands that the vehicle, AVP Partnership Ventures II, will target $500 million in commitments. A first closing of $200 million is anticipated for the first quarter.
The new strategy also capitalizes on the growing trend among institutional investors to go direct with operators, as opposed to investing in commingled funds, adds West. “They want to get closer to the real estate and the decisions that are being made at the property level, but there’s also an element of questioning certain aspects of the commingled fund structure,” she said. “There’s a view right now that if they go direct and they go through programmatic JVs, they will have better execution with a better source of deal flow, and be able to ‘turn the spigot off’ if the circumstances change.”
Adds Chase: “It’s a challenging market environment to find compelling investment opportunities.” Because of their specialized knowledge and expertise, local operators have a competitive advantage in sourcing and executing on deals in their particular markets and property types. 
With its new fund, AVP will be adopting a so-called farm team approach, which will allow investors to openly interact with the operating partners. This is distinct from a typical allocator fund, where “there is generally no attempt or desire to make introductions and facilitate direct relationships with the underlying managers,” says Chase.  “That is a very significant part of our strategy.”
AVP expects to invest in six to eight operating partners through the new vehicle. In most cases, participating managers will be smaller groups that have not previously raised institutional capital or do not want to raise capital through a fund format. However, AVP is adopting a strategy first, manager second, approach in selecting the operators for its program.
“It’s going to be really more about their ability to execute a strategy that we have looked at and want to do,” says Bailey. “So if we’re looking at a city or looking at a market, if we determine through our research that multifamily is well-positioned and it should be in a certain area, we’re going to look for the best manager to execute that strategy, and that’s going to be our criteria.”
With its first vehicle, AVP considered firms “graduated” once their assets under management reached a certain size.  Now, graduation will be more broadly defined as when the operator is able to access institutional capital directly, either through its own joint venture or fund. Given investors’ own desires to go direct, cap-and-gown time may happen sooner rather than later.