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EDITOR'S LETTER: A matter of trust

A wealthy retired gentleman in Los Angeles County who sold his investment management business years ago and has since run his own family office, said something to me recently that really struck a chord.

When I asked if he liked to invest in real estate because he could see and touch it, he replied: “That means nothing to me. I can hold my share certificates if I wanted to, but I don’t. I don’t want to touch gold either.” This gentleman was happy to remain a passive investor. In fact, when we spoke he happened to be itching to fly off for his wife’s birthday celebration and to go sit on a beach. 

We here at PERE rarely hear investors say they are content to be arm’s length. Nonetheless, this experienced businessman and wise LP – who rightly pointed out that all family offices were different in that some loved real estate because they could relate to it so easily – is not being ridiculed here. His point was that after doing due diligence on a real estate group, he should be able to trust the manager implicitly. He didn’t feel the need to check up on the assets in a fund himself to make sure his investment existed or was being managed properly.

You see, that is the ideal scenario, but the issue of trust still lingers today. We may have just about gotten over the global financial crisis, but new issues have surfaced. 

For example, the SEC’s new Private Funds Unit examined real estate advisers last year and concluded that ‘vertically integrated’ ones, meaning in-house teams which provide property management, construction management, and leasing services for additional fees, were being less than honest or transparent when it came to claims about charging fees ‘at market or lower’ levels. 

That is disappointing to hear. And now we know that the SEC is turning its spotlight on real estate advisers more generally having already examined fees and transparency issues at private equity firms and hedge funds. Now, more than ever, it is necessary for firms registered with the SEC – and that pretty much includes all of the PERE 50 ranking firms – to ensure they clean the shop floor and more than that, have in place long term fee practices in all areas that are transparent and fair to LPs. 

Enjoy the issue,

Robin Marriott