The rise of the asset manager

In the pecking order of roles at private real estate firms, acquisitions people have long received top billing. But the once supporting role of asset management is now getting its time in the spotlight.

Asset management’s star has been on the rise for some time. In the 2019 edition of PERE’s joint compensation survey with executive search firm Sousou Partners, we observed a significant increase in remuneration for professionals responsible for creating and preserving value.

Last year’s survey results showed that asset management skills had only become more valuable as the industry focused more of its time on property updates and conversions, particularly in the office and retail sectors. In 2019, the highest-paid acquisitions directors in private equity received 27 percent more in total compensation than their asset management counterparts. That difference narrowed to approximately 13 percent in 2021 and 7 percent in 2022.

This year, however, marks the first time in the survey’s history that asset management professionals have eclipsed their acquisitions colleagues in remuneration growth. Total compensation for private equity asset management professionals at the managing director and director levels saw 7 and 3 percent median growth, respectively, last year. Their acquisition peers saw a change of 5 percent and -2 percent by comparison.

“The likelihood is that it’s all about value creation, and less about doing new deals,” says Ghada Sousou, co-founder of Sousou Partners, regarding the higher compensation growth in asset management. “That must have bumped up demand for asset managers, and, more importantly, for workout skills which falls within asset management.”

There are plenty of reasons to believe that asset managers will not be disappearing from the marquee sign any time soon.

The first is that the rapid rise in interest rates has made financial engineering via debt more challenging. Net operating income will become a larger component of returns and those doing the work to maximize NOI will likewise command a higher percentage of a firm’s compensation pool.

The second reason is that managers are increasingly requiring staff that can work in all weather conditions. Asset management professionals are needed during every part of the cycle, but especially during times of market dislocation when some firms are struggling to stay afloat. One manager told PERE the firm is “doubling down” on asset management as it focuses on cashflow preservation amid a challenging macro environment.

In fact, during an economic slowdown, more acquisitions people may find themselves taking on asset management roles. “During an economic downturn, typically, there is a movement for real estate managers to retrain their investment professionals to focus on asset management, given that transaction activity has slowed down significantly,” says Serena Althaus, European chair at rival executive search firm Ferguson Partners. “Moreover, the firms do not want to let go of their transactions people because of the anticipated challenges of hiring new investment teams when the market recovers.”

Finally, a longer-term trend toward open-end or evergreen investment structures points to longer hold periods for assets. Non-traded REITs, separately managed accounts and other structures without an end date mean assets within those vehicles will require constant management to drive returns.

This trend can be seen in the dramatic growth of the open-ended fund universe over the past decade. Since 2012, dry powder for US core strategies, most of which is in open-ended funds, has increased from around $9 billion to $36.1 billion last year, according to commercial real estate brokerage CBRE.

A combination of a difficult macro environment, a slowdown in transactions activity and more long-term holds of assets means asset managers will continue to play leading roles in private real estate for some time to come. Their time in the spotlight is just beginning.