Rebuilding the trust

The annual PREA conference in Beverly Hills was all about the need to repair relationships – not just between GPs and LPs, but also among LPs themselves. By Zoe Hughes

It’s not often you get group therapy sessions that cater for more than 800 people, but that’s precisely what the annual fall conference of the Pension Real Estate Association resembled this week.

And like all good LA therapy sessions, the PREA conference provided plenty of drama and emotion along the way. Even before the two-day event officially started, plan sponsors were engaged in heated, private discussions about the role of GPs in the current real estate crisis, with plenty of anger being directed at fund managers for their dismal returns over the past year.

By the final day, that lingering anger – and frustration at the lingering anger – had boiled over onto the stage, with one large institutional investor warning all sides: “Just get over it.”

Like all relationship breakdowns, the problem is fundamentally about trust. Some LPs feel betrayed by fund sponsors, who, in their minds, failed to adequately predict and prepare for the scale of the real estate recession we are currently seeing. GPs, on the other hand, also feel let down by the very people they are supposed to be closest to, and who in their minds are sometimes proving more of an obstacle than a help in finding solutions to the problems at hand.

This trust issue though is certainly not restricted to the GP-LP relationship. Indeed, the PREA conference clearly highlighted the simmering tensions in the LP-LP relationship as well.

Steven Hason, managing director of North America real estate for the Dutch government pension fund APG, told angry delegates to “get over it” and move on, he was directing much of his comments at fellow limited partners. “Waxing” on about the “short-sightedness” of an LP or GP was not “constructive”, he said.

It was a sentiment echoed by Mike DiRe, director of real estate at the California State Teachers’ Retirement System (CalSTRS), and Marjorie Tsang, assistant comptroller for real estate at New York State Common Retirement Fund, who both said it was time to move beyond the anger.

But with some LPs apparently drawing up lists of other “bad” LPs they will no longer invest alongside, can we ever expect trust between limited partners to be rebuilt? If LPs can’t trust one another, will the trust between GPs and LPs ever return?

The expectation has to be that it will. Even with increasing talk of a move towards more club-like investment structures, the private equity real estate model has relevance in today’s market. It provides access to skilled managers and strategies that a pension, endowment, foundation, high-net-worth individual or family office simply couldn’t achieve on their own. In other words, there is a strong incentive for managers and investors to repair their relationships.

But as one PREA delegate told PERE: “Trust comes on foot, however it leaves on a horse.” Aside from the dramatic emotions on display, PREA clearly demonstrated that rebuilding the trust between all concerned will require a lot of hard work, negotiation, plenty of give and take and constructive dialogue.

For many, that process is already underway. Just don’t expect a group hug anytime soon.