How would you describe the current fundraising environment for private equity real estate?
It's extremely active, but I think it's important to note that the state of affairs doesn't make real estate any different from other asset classes—emerging markets, hedge funds, timber, private equity, for instance, are all experiencing a similar dynamic driven by the high levels of global liquidity. A notable difference, perhaps, between real estate and some of the other asset classes is that a broad range of investors have increased their policy weights and target allocations to real estate in recent years.
What other changes have occurred in the fundraising market over the past several years?
There have been a number of changes, perhaps all driven, in part, by increased liquidity in the market. It's certainly no surprise to anybody that there is a proliferation of choices in all sectors, all geographies and all risk-return strata—it sometimes seems as though anybody who has ever bought or managed a property is investigating whether they should be raising a fund right now. A second area is what I call the super-sizing of funds. Anybody that used to raise $150 million is now raising $300 million; anybody who used to raise $500 million is now raising $1 billion and so on. I think that the increased liquidity has allowed GPs to dictate and negotiate more manager friendly-terms. The last change is really a rapid turnover of capital. That may be one of the greatest ironies of today's market—with all the talk about how tough it is to find deals, many managers are putting more and more capital to work more and more rapidly.
Harvard is trying to grow its real estate portfolio towards its 10 percent target allocation. What areas or sectors are you focusing your attention on?
We are focusing our attention in a number of areas. In the past two years, we have taken a domestic portfolio and made the first steps in making it a global portfolio. We've taken a portfolio that was entirely private and added public market exposure to it. We've taken a portfolio that was entirely passive LP positions and added direct investments to it. We are growing the portfolio by selectively adding things that we don't have and growing where we like what's happening. Of course, the process of getting to the 10 percent allocation is a function of finding suitable opportunities.
Harvard is very well regarded in the alternative asset sector, including real estate. What do you attribute that reputation to?
I would say that there are probably a number of items—and depending on who you talk to, you may get a different answer.
We have clarity of mission with a single constituency. Our goal is to generate high and sustainable returns on the endowment and related funds in order to serve the long-term mission of the university. As a result, we have a long-term perspective that allows us to build and continually reinforce key relationships and thereby evolve with our managers in a way that can make them more powerful and efficient over time.
We also have a strong balance sheet. We have the ability to provide liquidity to markets where and when others cannot. We have an efficient decision-making process. We have strong and deep operations and information technology teams. And our unique-hybrid platform that uses both internal portfolio mangers and external mangers generates a constant flow of detailed market data that allows us to be a flexible and innovative investor.
When you are presented with an opportunity, what are the most important factors that you look at?
There are four key areas: people, strategy, structure and fit. In terms of people, it is very important that we have familiarity with and, preferably, pre-existing experience with the team. In terms of the strategy, we need to believe that the managers' vision is not only viable but also executable with their current team. In terms of structure, we are looking carefully to see if the proposed terms meet our standards and, if they do not, we are not shy about stating pretty clearly what we need to see changed. And the last category, the fit, is the ultimate question of, even if the first three categories check out, is this something that we want in our portfolio? Does it complement our assets or does it create unnecessary, overlapping mandates with our existing managers?
In today's environment are you being forced to make commitments to funds a lot quicker than in the past?
There's a high level of contrived urgency in today's market. That said, we're in close contact with our managers and if they, for whatever reason, need assistance from us, we'll do whatever we can in that situation. This can manifest itself in different ways. We've had managers approach us on direct investments that required a rapid close. If we like the dynamics of the deal, we'll clear our calendar so that we can run a parallel due diligence process with them. We've also had managers ask us to front-load negotiations on a new fund and then sign a commitment before other LPs. That helps them streamline their fundraising process. As part of our long-term approach of building relationships with our managers, if we can deliver, we will. If we can't, we'll explain what our challenges are and try and find a way to work through it.
Are there any types of strategies/geographies that are coming across your desk more now than in the past? Which ones are gaining more traction?
We're seeing more of everything—in terms of asset class, geography and strategy. But all emerging markets are hot, and none more so than India. It's probably not too far of a stretch to say that we're seeing almost as many India-centric funds as we are in all other emerging markets combined.
With today's overhanging supply of capital, the majority of people out there trying to raise a fund are gaining traction eventually. They may not raise as much capital as they had hoped for. Their LP constituency may not be what they had hoped for. But they still manage to get it off the ground one way or another.
What piece of advice would you provide to a fund manager who wanted to raise capital from your institution?
There are probably two pieces of advice. The first is: don't just talk at your LPs; listen as well. The second piece is: don't try to sweep anything under the carpet. Be open with us about everything, including the warts, whatever they may be, because odds are we're already aware of them.
What advice would you provide to your fellow institutional investors?
I think, again, two pieces of advice. The first is: keep pushing standards even though you have to recognize that the leverage today rests with the managers. And the second is: spend the time to get to know the teams, not just the leading principals. It's usually the teams who do the work that will make or break the fund in a normalized market. And it's also the teams that are more likely to give you some insights into the underlying issues at, or tensions within, an organization.
Do you see a slowdown in the fundraising market anytime soon?
I do not. I do not see a major slowdown in terms of commercial real estate fundraising and investing. It's certainly possible and arguably even likely in the residential end of the arena. But there is such an overhang of institutional capital on the sidelines due to those increased allocations and it takes such a long-time for those allocations to change. I think it's likely that liquidity will remain high for some time and I expect it will take a major unexpected event—or a series of them—to change the directional momentum of the capital in the market.