It is often said that real estate is a people oriented business. The same can be said for the capital markets that support it and nowhere is there a greater onus on the human aspect of the sector than in the marketing meetings between investment managers and their investors.
Accordingly, both sides of the table regard pressing the flesh with one another as an integral part of their job. “Even in this day and age of being exceedingly digitalized, nothing surpasses a face-to-face meeting,” says Benjamin Lee, co-founder of Phoenix Property Investors, one of Hong Kong’s longest running private equity real estate firms.
“In addition to being told a flat yes or a flat no to your product, there are many shades of grey and if you can be in front of an investor, you will have a much better feel of how interested they are.”
Lee has led the raising of five opportunistic funds. The latest of these closed in 2013, oversubscribed at $750 million thanks to commitments from more than 20 institutional investors. “We probably went around the world five times.” Each trip, he recollects, took on average four weeks, entailed more meetings than he could count and the overall fundraise cost “low single-digit” millions of dollars.
As Phoenix’s capital-facing leader, Lee regards the job of raising capital as not for the faint-hearted and something that requires “looking at yourself in the mirror”. Today, he is looking in the mirror once more as Phoenix readies the launch of its next vehicle.
Rob Wilkinson, chief executive officer of Paris-based investment manager AEW Europe, predicts the campaign for its next European fund will require more than 100 flights, between 100 and 200 meetings and approximately £1 million (€1.26 million; $1.43 million) of funding, if no placement agents are required. That is what it takes to collect about €500 million in equity commitments, he forecasts.
Like Lee, Wilkinson underscores the importance of getting the pitch done properly. “Road shows have a cost,” he says, “but that must be put in the context of what it’s worth. Is it worth 2 percent to 3 percent of AUM? Well, that means the outcome of the meeting is worth $2 million to $3 million. Think about that before going into the room.”
Preparation makes perfect
Like many courting rituals, a meaningful component of success comes in the preparation. For Phoenix, a firm with a singular focus on real estate, one important step is to win the approval of consultants, a growing influence for poorly resourced investors, before starting a campaign. As stewards for a wide spectrum of investor types, “they are a group one ought to speak with at an early stage,” he says.
Platforms within larger organizations can use internal resources as well. At UBS, the Swiss investment bank, for instance, stress-testing the thesis of a new property fund can be done via internal distribution teams, says Eoin Bastible, head of business development for EMEA at the bank. Again, broad market testing is key. “In Europe, we’re talking about maybe 15 to 25 investors, similar in the US, same again in Asia.”
While there is consensus that consultant visits signal the start of a fundraising, there is nuance in how consultants regard themselves being managers’ first step. Jay Morgan, senior portfolio manager at Cleveland-based Courtland Partners, says: “If we know, going in, that we’re brain storming then we’re comfortable. But if we don’t know that’s the objective and an idea comes across as half-baked, we can get really irritated.”
As we approach the late stage of current market cycles, Morgan says: “At the margin, we’re seeing a slight increase in that,” noting the offenders usually are firms with a track record in one area sensing an opportunity in another area, but lack the relevant experience in that area. “Then there are managers who run diversified strategies and throw stuff against the wall. You can tell they’re building the plane mid-flight. They haven’t given it thought, worked out the economics, don’t know the profit margin.”
Courtland typically spends between 5 percent and 10 percent of its manager-facing time on new ideas. Unsurprisingly, Morgan does not want this time wasted by chancing fund managers.
AEW Europe’s Wilkinson agrees that a command of the facts is paramount. His attitude is that one “I’ll get back to you” response to a factual question is acceptable. Two, however, and: “you shouldn’t be in the job.”
Paul Jayasingha, global head of real estate manager research at New York-listed Willis Towers Watson, meanwhile, takes a less stringent position on such meetings. “We’re happy to engage with managers on half-baked ideas,” he says. “By doing the other half we can make sure it is baked to the consistency of our clients.” He references a fund co-designed with Knight Frank Investment Management, the investment management business of property services firm Knight Frank, last year as an example of prior success. “We were able to set the prospectus guidelines.”
Setting out stalls
Jayasingha is adamant, however, about setting parameters relating to the manager itself before taking a meeting. “The sheer number of managers out there requires filtering,” he remarks. As such, rejections are likely to go to managers that have gone through recent corporate changes and those whose fee structures do not chime with its expectations. “We won’t argue fees on a basis points level, more at the framework level, like fees on gross assets, which we have a hard time with, versus net assets.” By Jayasingha’s reckoning, the more meetings with a manager, the more diminished his negotiating power becomes. “The more you have, the more they know you are interested.”
Anthony Breault, senior real estate investment officer at the Office of the Oregon State Treasurer, “oscillates” on the topic of fees, but generally leans towards discussing them at the end of the first meeting. “I don’t want fees being the governing decision on why I invest,” says the steward of a portfolio valued at around $8.5 billion.
Then there are regulatory boxes that need ticking before a meeting can occur. Christophe de Taurines, managing director of European investor relations at Los Angeles-based investment manager Colony Capital, says early demonstrations of compliance are more important than ever before. In Europe, for instance, ensuring Alternative Investment Fund Managers Directive conditions are met is paramount. “For EU managers, it is straightforward. For non-EU-managers it is not.” He points out too how investors, such as insurers (Solvency II) or banks (Basel III), also have compliance hoops to jump through to qualify for certain meetings.
Then comes the all-important human factor. On both sides is a plethora of approaches and what forms traction in one meeting may not in another. That means social dexterity is a must, especially for marketers.
A first consideration is who attends the meeting. Some investors want to see the chief executive immediately. Others are happy with the head of investor relations. Bastible prefers three-man representations if possible, including the head if he has a prior relationship. de Taurines says Colony’s famous leader, Tom Barrack, will often attend if he has history with the investor. For Jayasingha, who attends is indicative of a firm’s culture, something he says is “massively important to us.”
Further thought should be given to who the investor is. Some are life-long investors, others are former managers and each requires a different approach, says Lee. Of ex-managers, he says: “these guys want to talk about deals. They read The Economist and so don’t need you to talk about the macro.”
For Oregon’s Breault, the pitch book should stay closed. “I want an iterative back and forth to get a feel for the team, its structure and the opportunity.” UBS’ Bastible, on the other hand, underlines the importance of a “research driven” approach. Regularly including a research figure in meetings is “something that goes down well with our client base, something that differentiates us from other managers.”
A general view is that the manager should do most of the talking in the initial meeting. But there is less agreement about exactly how much, who says what and when. Bastible and Wilkinson reckon pitchers should do about 60 percent of the speaking, while Jayasingha expects more like 90 percent. Breault would rather a more equal 50-50 split.
“A good meeting is punctuated with questions asked by the investor with some of those leading to a debate,” says Wilkinson.
Much can go right, or wrong, in the opening exchanges. Breault says: “I don’t want managers to tell me how good they are. I want to hear where they went wrong, to be introspective enough to know where improvements can be made. I want an integrity check.”
Jayasingha, meanwhile, saves the more interrogative conversation for subsequent meetings. “That’s when we do reverse engineering. Look at prior deals to understand portfolio weightings: if you work backward, you can watch for actual processes rather than what they say a process is. Often they are radically different.”
Some investors want to see a clear demonstration that their own strategies are understood. Breault says: “A good GP understands I am investing for a need. If they are brought in, it is not a question of them being good but whether they fit with my point in time. I need round pegs to fit round holes.”
Others would rather a manager with a certain skill set does not tailor its product to suit and so offers a purer presentation of the product on offer. Says Jayasingha: “We want the manager to do 90 percent of the talking because we want to understand if what the manager is doing is compelling.”
Consummate marketers are adept at recognizing the signs of pitching success and failures. The indicators start immediately too. “How enthusiastic was the investor to see you?” Lee asks, noting how some investors take meetings to be polite to managers traveling to their town. “The next signal is how engaged is the investor?” Here is where the anecdotes vary from thorough examinations, “I’ve had meeting in which I was told I’d have 20 minutes and it ended up lasting four hours,” Lee says, to those where the investor has fallen asleep. “That is particular the danger when they have traveled a long way and are suffering from jet lag,” says de Taurines who adds a slump in the chair or a yawn are the warning signs. “If someone is keen on working with you, you can see it in their eyes.”
Breault says: “I’ve never fallen asleep, but I have sat through a meeting and really struggled.”
While an undesirable outcome, Phoenix’s Lee says it is important to recognize the signs when a pitch is not working. “Sometimes they’ve said their interested, but within 10 minutes they start shaking their heads. In which case, cut the meeting. Don’t waste people’s time.”
Similarly, some investors take meetings for a free education and have no intention of making a commitment. Breault admits: “I do that. But if there’s a meeting where I know they’re not going to have an investment, they’ll know before they walk through the door. They recognize I might be interested in two to three years’ time.”
Wilkinson says: “Relationships don’t get built from one meeting anyway. The process requires investors to spend time and that might need several meetings. Is that being used? No. It is equally interesting for us to hear what they’re thinking about, even if it doesn’t necessarily fit with what we’re doing.”
Market and structural factors will always underpin fundraising meetings between private real estate managers and their investors. But once in the room, the emphasis shifts to the people involved. “Apart from the technical,” says Wilkinson, “it comes down to one thing: whether the person on the other side of the table likes you.”