A rare glimpse into the way family offices think about real estate was offered during PERE’s annual Global Investor Forum in Los Angeles in April.
In a session called “All in the Family”, three panelists explained how their respective organizations dealt with modern-day investing and what potential deal partners could do to turn them off.
Moderated by Larissa Herczeg, managing partner and chief investment officer of seeding and strategic capital at Chicago-based Oak Street Real Estate Capital, the panelists comprised; Kathy Briscoe, chief operating and real estate investment officer at Cordia Capital Management, Mark Kruttschnitt of CML Investments and Adi Divgi, president and chief investment officer of EA Global.
Divgi, who used to oversee opportunistic fixed income investments for four New York City pension funds and now invests on behalf of his own family office and a reinsurance company, said the way he invested in real estate was more “happenstance”. Addressing a question concerning the turn-offs of a potential partner bringing a deal, he said lack of knowledge of tax effects of investing was “disappointing”. “The managers that have the knowledge and know-how to structure deals will certainly have a leg up in my book.”
He said he preferred evaluating managers smaller than $2.5 billion in total assets under management as he typically found greater “alpha” in that strata of investment partners. He cited an example of an investment in a Los Angeles-based real estate investment firm that raised $25 million, making an investment into the fund at the final close, after it had already sold one investment. “Investing at the final close enabled us to get a level of visibility that many managers do not provide, because they encourage you to get in by the first close. The visibility, transparency, and proceeds coming back so quickly were among the factors that I found compelling”.’
Cordia Capital’s Briscoe said the firm was only making direct investments and was working with consultants to help inform asset allocation and provide good risk-adjusted return analysis. The family office has a mandate for core, value added and opportunistic investments. She said one of the challenges was in having a lean staff and to compensate the talented team as if they were working on a long-term fund.
Meanwhile, Kruttschnitt explained how he looked at just risk-adjusted returns for the different asset classes and said family offices thought a lot more about taxation than institutional investors did.
He said most of the deals he becomes involved with are introduced by local operating partners. “Being part of the GP can be great,” he said. “It needs regular meetings and takes a lot more time than being a limited partner but the pays-off can be much more lucrative.” But one of the most frequent factors that made him “walk away shaking his head” was either not agreeing with an individual’s view or a lack of preparedness on the part of the firm introducing a deal. He said: “It is amazing to me how little due diligence some managers will do before presenting a deal to their equity markets. If I can find problems with the deal in the first five minutes that they hadn’t thought about after three weeks of showing it to multiple investors I just walk away not only from that deal but from the person that is presenting it to me.”
Responding to another question about common mistakes, he said mistakes were linked to resources and experience. “If you don’t have a long background in real estate you shouldn’t be making direct investments. It is the same with venture capitalism. If you don’t have tech expertize, you should not be doing individual VC deals. Sometimes people get stuck when they don’t know the submarket or type of property or the greater economy of the area.”
Divgi added he was often looking to network with other family offices where not only could he swap ideas but also be introduced to transactions. He added he was also looking at making fund commitments, but highlighted how alignment of interest was important. “If a manager puts in one percent of the equity and they are taking out 1 percent in fees every year I don’t think that is skin in the game. I would look for a much higher percentage. With direct deals there is much more alignment of interest.”