INTERVIEW: Toss and turn

Eugene Diaz founded Prism Capital Partners in 2002 after a successful career working at developer Gale & Wentworth that had formed partnerships with Morgan Stanley Real Estate Funds and JP Morgan Investment Management Investing in the 1990s across the US.

Nowadays, he and his colleagues can be found scouring the Tri-State area of New Jersey, New York and Connecticut for residential, office and industrial deals.

His firm has struck investment ventures with several opportunity fund managers and investment advisors such as S. Norwalk, Connecticut-based Greenfield Partners, Clarion Partners, BlackRock Real Estate, and Angelo, Gordon & Co, among others.

In an interview, Diaz explains that one of the issues with the larger institutional investment advisors is that many of them do not like to deal with ‘new’ operating partners notwithstanding the fact that principals may possess a long track record of significant returns. One firm once said to him: “It is so difficult to get our portfolio managers to get comfortable and resolved on a new partnership relationship. We generally don’t like new partnerships even though you are not an unknown team to us.”

Diaz agrees that many capital partners want mostly opportunistic with some core-plus deals given the market. “It is understandable. I get calls constantly from would-be capital sources who need to deploy capital through operating partners. Our track record is 24 percent-plus IRRs on $500 million in equity, but investment funds understand that it is really hard to make a 20-percent return. Core-plus returns are easier to achieve given borrowing rates. But then again, there are not that many core-plus advisors and a lot more opportunistic money,” he says.

He also points out core-plus deals tend to require less expertise and proprietary knowledge and can be done by the fund manager itself. Indeed, sometimes the operating partner finds himself competing with funds.

He observes another challenge for operating partners. Some investors have put their opportunity fund managers under pressure because of the ‘double promote’, one to the fund manager and the other to operating partner, thus diluting the return to the limited partners. “In one instance we had a partner we did several deals with successfully. Some of their investors said to them on the fourth or fifth fund, ‘if you are real estate experts, how come you do all your business in joint ventures with operating partners that do all the real estate work?’ A partner came to us and said we cannot do deals anymore because we have to get rid of the double promote to keep our investors happy.”

In this case, the firm offered not to pay a promote but much more in fees.

Diaz makes another point that turns that tables on some critics of operating partners stemming from deadlock on projects during the global financial crisis when there was over-leverage. “As an operating partner, how you ended up doing coming out of the recession may have depended more on the partner that you picked than on the deal that you bought,” says Diaz. “You might have found that the fund had no more capital to put into your deal because the fund made losses on deals somewhere else or otherwise was choking on guarantees at the fund level. The ability of your capital partner to have managed the fund well may have been more important to the success of your deal as an operating partner than how your deal was.”

He further explains that his firm has five transit related development sites under contract in New Jersey alone. But rather than go to an opportunistic fund manager or an institutional investor, Prism has structured a fund capitalized by high net worths to sponsor these deals. The hope is that this will dispel another challenge of partnering a fund.

“One of the problems operating partners face with opportunity funds is you are subject to the vicissitude of the performance of the funds. Suddenly, they can get cold feet and liquidate or they have a time clock of a certain number of years. If it is just not the right time to sell, you as the operating partner that has put co-investment in can get hurt.”

In other words, Diaz explains the performance a deal may be tied to the longevity and life cycle of a fund. And poor outcomes can hurt the local operator more than a portfolio manager or fund.

“If the fund messes up on one deal it doesn’t necessarily reflect badly on the fund in that market. But operating partners tend to be locals whose reputation is tied to every deal he does.”

It is a salutary point.