The law of the land

Over the past 15 years, the growth in the private equity real estate industry has been dramatic, both in terms of size and geographic scope, which means the legal and regulatory challenges involved have grown as well.

Things used to be so simple.

When the private equity real estate industry first emerged more than 15 years ago, US-based opportunity funds raised money from US investors and acquired US assets. Delaware limited partnerships were straightforward and, given the success of the leveraged buyout industry, battle-tested. And terms like carried interest and management fees were familiar enough to real estate participants that the industry could comfortably adopt the LP/GP model as its own. There were no doubt heated negotiations— and as any GP will tell you, raising capital in such an environment was not an easy task—but the earliest opportunity funds made so much money that few investors felt the need to fiercely debate the size of the GP catch-up.

Today, simple would be the last word most people would use to describe the global private equity real estate industry. Fund managers are scouring the globe for investment opportunities. Institutions in Europe, Asia and elsewhere are piling money into the asset class. And the various legal regimes of different countries around the world create a web of laws and regulations that make Byzantium look like a simple place to do business.

For all the talk about globalization, real estate, as the old saying goes, is still a local business. And it's governed by local laws, which can affect everything from the formation of limited partnership vehicles to the amount of tax a property investor in, say, France must pay to the local municipality.

As the industry continues to grow and evolve, so too are the partnership agreements and fund structures governing the sector. Given the similarities between private equity vehicles and opportunity funds, many of the same debates affecting the LBO market are also influencing the private equity real estate industry—debates, for example, on economic terms such as preferred hurdle rates as well as issues on governance, key men provisions and management succession. Since this is real estate, there are other topics that industry practitioners are grappling with, including the use of subscription lines and the proper structures for joint venture arrangements.

In the pages that follow, our journalists look at the changing legal and regulatory landscape in the global private equity real estate sector. In our first article, we cover a topic at the forefront of every investor's mind—as well as the minds of GPs on the fundraising trail: their limited partnership agreements. In both the US and Europe, the amount of capital in the institutional market is shifting the balance of power to GPs, particularly those with long and successful track records, making it difficult for LPs to get movement on terms. That's not to say, of course, that they're not trying.

Another related topic is the increasing globalization of the industry and its impact on how funds structure themselves to most efficiently repatriate cash to their investors. Whole books could be written on the difficulties involved in, structuring a US-based opportunity fund targeting global investments that accommodates investors from 30 different countries—it's not a book we would necessarily want to read, but the intricacies involved are topics that industry practitioners in today's day and age need to understand.

The world may no longer be simple. But simple is boring. Complexity adds excitement and opportunity, at least for those who can successfully navigate the waters.

Elsewhere, Macquarie Property Advisors, one of the most active property investors in the Asian market, provides an overview of the regulatory hurdles in the region's top markets. And we interview Frank Blaschka and Martin Rosenberg of The Townsend Group, a pension fund advisor to many of the US' largest institutional investors, to get their views on the past, present and future state of the limited partnership agreement.

The world may no longer be simple—the operational, financial, structural and legal challenges facing private equity real estate practitioners have all dramatically increased. But simple is boring. Complexity adds excitement and opportunity, at least for those who can successfully navigate the waters.