Real estate consultants – the gatekeepers to billions of institutional dollars and an influential force in the fundraising successes of the largest fund managers – are in the midst of an upheaval. As a consequence, they are becoming a source of disruption for their clients and of opportunity for their competitors.
This shift is most evident at the industry’s two best-known consultants, The Townsend Group and Courtland Partners. In April, Los Angeles-based real estate and investment management firm Colony NorthStar was exploring a potential sale of Cleveland, Ohio-based Townsend, in which it owns an 85 percent stake. As PERE was going to press, Colony was understood to have received a dozen bids for the firm and was close to selecting a winning bidder.
Townsend did not respond to interview requests for this article.
The sudden passing of co-founder Michael Humphrey in November has likewise left the ownership structure of the Cleveland-based real estate and infrastructure consulting firm up in the air. Prior to his death, Humphrey held a 90 percent voting interest in the firm, while managing principal Steven Novick owned the remainder, according to documents released last month from the Santa Barbara County Employees’ Retirement System.
The firm is in the process of finalizing an equity participation plan that would involve other employees acquiring part of Humphrey’s interest, which is now held by his widow, the SBCERS documents said. Since Humphrey’s death, the firm was also understood to be considering a sale and had received numerous offers from suitors.
Regarding its current situation, Courtland e-mailed the following statement to PERE but declined to elaborate further: “Courtland does not comment on rumors in the marketplace. The company has in the past and will continue to be open to discussions about industry partnerships that are value enhancing and consistent with our clients’ best interests and are in line with the company’s strategic objectives. More information will be forthcoming at the appropriate time.”
Meanwhile, Portland, Oregon-based RVK suffered its own shakeup earlier this year when its real estate consulting team, led by Dan Krivinskas, Mark Bartmann and Scott Krouse, spun out as Chicago-based real estate and real assets advisor Alignium.
Becky Gratsinger, RVK’s chief executive, said in an e-mailed statement to PERE: “RVK treasures its complete independence. Our firm chose a deliberate structure that ensures we are employee-owned by professionals actively advising, serving and supporting our many clients because we strongly believe it is the foundation for providing the most objective and trusted investment advice.”
Meanwhile, Hamilton Lane last month agreed to acquire Real Asset Portfolio Management, a Portland, Oregon-based investment management firm focused on real estate, natural resources and infrastructure. Established in 2011, the nine-person firm manages or advises on approximately $3.8 billion of real asset investments.
“This is an important development in the evolution of our real assets platform,” said Mario Giannini, Hamilton Lane’s chief executive. “Real assets is an area of increasing importance within the private markets, and the addition of the RAPM team will allow us to thoughtfully broaden our capabilities and investment resources in order to better serve our clients.”
These changes have in turn been a source of disruption for the institutional clients of these firms. At least 13 US public pension plans have launched real estate consultant searches in the past year, according to data from New York-based real estate advisory firm Hodes Weill and PERE.
During that time, at least two other pension plans changed their property consultants without issuing a formal request for proposals: Fort Worth Employees’ Retirement Fund amended its contract with RVK to provide solely general investment consulting and hired Alignium as its dedicated real estate consultant in March, while Courtland resigned as the real estate consultant of the Illinois State Board of Investment in late May, and was subsequently replaced by Rock Creek Global Advisors and Hamilton Lane last month.
“We’ve seen what appears to be an increase in the number of requests for proposals for consultant searches, which we believe is being driven in part by the maturing of the investment cycle as well as organizational changes at a number of the consultants,” said Doug Weill, managing partner at Hodes Weill.
Organizational changes have been a driver of multiple real estate consultant searches that are currently in process. The departure of the seven-person Alignium team, for example, has led at least four former RVK clients to issue RFPs for a new real estate consultant.
One such client was the City of Phoenix Employees’ Retirement Board, which disclosed in its February board meeting minutes that following the departure of the Chicago-based Alignium team, RVK “reassigned staff to its real estate area whose past work was in private equity, and … had not worked with real estate investments before.”
Moveover, the Alignium team had been working with RVK on an amicable separation for some time, but was informed in February that they were no longer part of RVK, a “sudden split” that had been unanticipated, the documents said. Because COPERS did not receive advance notice of the personnel change, it considered RVK to be in breach of its contract and terminated its relationship.
Termination of a consultant relationship can potentially result in former clients hitting pause on their real estate investment activities. COPERS, which has hired Alignium as a temporary consultant, had initially considered not making any new investments until they had chosen a replacement through an RFP process. Meanwhile, another RVK client, Orange County Employees Retirement System, has issued an RFP but hired Meketa to provide only monitoring services for the time being.
One pension plan said organizational changes would be a concern in evaluating a potential consultant: “That’s a factor whether it’s a consultant or a manager. The same issues would come up if there’s turnover at a manager, because you don’t know who the people at the top might be, who to approach, what it might do to the business.”
Yet organizational changes in and of themselves are not necessarily a deal breaker. In May, the Hawaii Employees’ Retirement System completed its real estate consultant search and replaced Courtland, its longtime dedicated advisor in the asset class, with Aon Hewitt. Vijoy Chattergey, the pension plan’s chief investment officer, told PERE that the pension plan conducts a new real estate consultant review every five years and the search was unrelated to Humphrey’s passing.
“Ownership changes and personnel changes always require additional diligence on our part to understand what’s going on in an organization being evaluated,” he said. “We want to understand what the plan is and if anything is anticipated. Changes in roles and coverage are important elements in making decisions for us. But it doesn’t lead to us ruling out a consultant in and of itself.”
An evolving client base
At the same time, the consultant searches are taking place against the backdrop of a more complex real estate investment environment. For example, although Hawaii ERS’s latest RFP process was not significantly different from its previous search five years ago, the pension plan focused more heavily on certain consultant capabilities this time around.
“My emphasis was more on the ability to develop and build strategic partnerships with the real estate fund managers,” said Chattergey. “We’re still interested in funds, but if I’m looking at the next five or six years, I’m thinking about how we could grow our activities. That is something I had in mind and that would have had some bearing on who the finalists were.”
In addition to Aon Hewitt, the other two finalists were Courtland and Townsend, Chattergey said. “We ended up with good options in terms of our finalists. All of them had those capabilities to the extent we would be happy to work with any of them. I wouldn’t put any finalist in front of the board that I wouldn’t be happy working with.”
One US pension plan that currently has a search underway also agreed more is expected of a real estate consultant than in the past. “You’re relying on a team to be able to help you execute on real estate, whether it’s an acquisition or value-added repositioning or the ultimate sale,” he said. “It’s a deeper set of skills. You would want someone on the consultant side that can do more than just pick some collection of top-tier funds, but also has the expertise to drill into some lesser known managers.”
Meanwhile, Meagan Nichols, global head of the real assets investment group at Cambridge Associates, has welcomed the uptick in searches. “It’s created a lot of opportunity for us,” she said. “We are responding to more RFPs, and I think it’s a function of how many are out there.”
Nichols noted that there are more real estate consultants than there had been 10 years ago, as real estate has shifted from being part of a larger private equity or overall portfolio mandate to becoming a dedicated asset class.
“Increasingly, as more and more dollars are going into real assets, there’s more of a dedicated need for specialized advice, whether it’s advising on deals or co-investments, or advising on strategy and how you actually build the portfolio,” she said. “It’s not just about the implementation and picking managers, it’s also about what’s the strategy for building this part of the allocation for the long term and what’s its role in the portfolio. I think some of the questions have become more complex, and so it needs more dedicated specialists.”
In response to the more specialized needs of investors, Cambridge has expanded its real assets consulting businesses over the past few years, officially establishing a co-investment practice in 2014 and a credit investment group last year.
But while consultants face greater expectations from their existing and potential clients, they also are grappling with tougher competition.
“The industry remains a highly competitive space, especially in regard to winning mandates with public funds,” noted Scott Krouse, managing principal at Alignium. “Public fund mandates tend to be very broadly advertised and marketed and more so than the foundation or corporate plan space, public funds tend to have a very strong focus on the fees paid to their advisors.”
But it is not just on fees that consultants compete. “When they compete with each other, they get brutal,” said one industry observer. “They say, this one has that issue, that one has that issue.”
One of the most prominent issues raised is potential conflicts, particularly in the case of Townsend, which has both a sizable advisory business as well as an investment management platform, with $15 billion of assets under management and $173.1 billion of advised assets as of September 30, according to the firm’s website.
As a result, some consultancies make a point of distinguishing themselves by denouncing such dual business lines. For example, in a real estate consulting presentation to the Pennsylvania State Employees’ Retirement System in March, American consultancy NEPC concluded with the following: “NEPC is driven by a passion for investments and serving clients without conflict or divided loyalties.”
As for Cambridge, Nichols described her own firm as such: “A lot of the things that [investors are] reacting to that are happening with some of our competitors are not challenges that we’re facing. We’re a very stable team that’s growing; the average tenure of our team is over 12 years. We don’t have a lot of ownership issues or third-party products or a lot of conflicts of interest.”
‘Stable’ is a key word, as staff retention has been a thorn in the side of some consulting firms. Over the last five years, Courtland had 59 percent real estate staff turnover and 13 percent senior real estate staff turnover; another advisory firm Hamilton Lane had 80 percent real estate staff turnover and 40 percent senior real estate staff turnover; and another, ORG, had 25 percent real estate staff turnover and no senior turnover, according to documents from the Santa Barbara County Employees Retirement System.
Meanwhile, more players are entering the fray. It is notable that of the 13 searches, four contracts went to new or lesser-known names in real estate consulting: Alignium, AON Hewitt and Pavilion Alternatives Group. Illinois State Board of Investment also notably picked two less-established firms in real estate to replace Courtland and referred to them as “strategic partners” rather than consultants in an announcement last month.
While there may be more competitors in real estate consulting than there had been in previous years, there are also more real estate investors. Potential conflicts aside, one of the factors that has made Townsend attractive as an acquisition target is the greater demand for consultants, particularly from overseas investors. “It’s a growing asset class with increasing allocations,” said Weill. “The marketplace is also becoming more global, with more capital flowing cross-border, requiring more advice from consultants. There are a number of institutions with new allocations to real estate, and many lack the experience to transact on a more direct basis. We’re seeing a number of these offshore investors increasing their use of consultants.”
In the face of this influx of capital, consultants like Cambridge are finding it to be an opportune time to raise its profile and capture new business. “For us, we’ve been advising clients on real estate since the early 80s,” said Nichols. “I’m not sure everyone in the world of institutional investing always thinks of Cambridge when they think of real estate advisors or real estate investment managers. So it’s not that we need to change what we’re doing; we’ve certainly built our capabilities over a long period of time. But it’s actually raising our hand and saying, hey, here’s a reminder we actually do this. It’s actually just getting the word out.”