Specialise or die

Advice to fund managers out there: find your niche and stick to it.

As most GPs recover from a year in which fundraising proved almost impossible, the European Association of Investors in Non-Listed Real Estate Vehicles this week offered some advice to private equity real estate fund managers hitting the capital raising trail this year – ensure you have a specialism.

Unveiling its investor universe UK survey for 2010 at the annual MIPIM conference in Cannes, INREV provided a difficult prognosis for the non-listed real estate world, warning that over the next three years 30 percent of British institutional investors were set to reduce their exposure to the non-listed sector, in favour of direct and joint venture investing instead.

Interest [in pan-European and global strategies] is now re-emerging as new mandates come through … The overall impression from most investors and investment consultants is that the longer term justification for a multi-national real estate strategy remains strong. INREV

Despite wanting to increase their allocations to real estate overall, the report concludes, non-listed funds are not the investment model of choice for some investors. Indeed, a fifth of the 39 respondents were “fundamentally opposed to using non-listed real estate vehicles”. It’s a trend also in force in the US and across Western Europe, as some investors spurn the indirect model amid concerns over risk, illiquidity, control and cost.

British life funds were the largest group in the report expected to cut their exposure, with 38 percent of all life funds surveyed saying they would cut the proportion of non-listed real estate in their portfolios. Even the 25 percent of life funds that said they would increase their exposure noted it would be “involuntary”, as the value of illiquid funds swelled in the overall portfolio.

The news makes somewhat hard reading for any GP. However, if fund managers take one piece advice from the 43-page report it has to be this: GPs with a key specialism, and notably investing outside the UK, could succeed in attracting capital from British investors in the long-term.

There are lessons to be learned here for GPs targeting investors anywhere.

Of the £23 billion (€25.8 billion; $35.1 billion) of capital currently invested in non-listed real estate funds by UK institutions, around £8 billion is targeted at managers investing outside the country. Over the next three years, INREV predicts that £8 billion figure could almost double to £15 billion – largely at the expense of UK-focused non-listed funds.

Although most UK investors were eagerly eyeing their own back yard at present, INREV noted “interest [in pan-European and global strategies] is now re-emerging as new mandates come through … The overall impression from most investors and investment consultants is that the longer term justification for a multi-national real estate strategy remains strong.” It added: “The primary motive for using non-listed real estate vehicles was to provide access to out-of-reach sectors and to skills and expertise not available directly.”

Although the INREV report is restricted to questioning the intentions of UK institutional investors, (including 26 pensions, eight life funds, three charities and two insurance companies), it is representative of global fundraising trends.

With many LPs today trying to look for alternatives to the non-listed fund model, fund managers trying to be everything to everyone in 2010 are unlikely to secure many hard commitments – irrespective of where they hail from.

And UK specialists should take heart – just as UK investors are seeing fit to expand beyond their own boarders, non-UK investors are having the same urges, which could spell opportunities for UK general partners to take in overseas investors. A firm that may be a viewed as a generalist in his own land may find himself to be an exotic niche player abroad.