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Veto power

As LPs weigh their options, two real estate funds are offering investors the ability to say ‘no’ to certain deals. By Jonathan Brasse

It’s been well documented that investors want to be as close to their investments as they can.

Since the year began (and possibly before) some LPs, including US pension funds, have been asking for – bordering on demanding – constant communication, even if the news they get from their fund managers is bad. Others, namely sovereign wealth funds, have declared time-out on new commitments to blind pool funds. These investors have ambitions to become more active as direct real estate investors.

In such a climate, fund managers such as New York’s Citi Property Investors and McLean, Virginia based JER Partners, have switched their strategy to defence, swapping expansive fundraising to more intensive fund management.

Those GPs who need to raise capital are facing a population of more sceptical LPs. PERE has spoken with two fund managers who both want to continue raising vehicles but are bold enough to recognise the need to grant incentives not dreamed of in previous years.

The common thread between them? Dilution of their GP discretionary control.

One fund manager, which is currently drawing up plans for a follow-up fund to its first effort, is going to offer its investors the right of veto on any deal presented. This GP will bring the investor so close to the assets that, after absorbing all the detail, the investor can either embrace the deal or insist it goes no further.

The fund manager, which plans to launch its second UK opportunity fund having committed the lion’s share of its first vehicle, says investors should view the incoming fund as an “investor club”.

To join the club, “members” would pay 25 percent of the equity of its first deal – the blind portion. However, a word of warning to those so cautious they want to exercise their right of veto repeatedly: the fund manager in question is also drafting a “three strikes and you’re out” rule.

The other fund manager has taken a slightly different tact, albeit with the same principle in mind. In its flyer for a Paris office fund aimed at investing in the core plus and value-added realm, investors are offered discretionary control in the form of voting rights proportionate to their committed capital. Its message is clear: commit big, have a big say.

If these and other similar models gain momentum, perhaps the market will witness the start of a new era in fund investing in which investors are more actively involved, blurring the line between “limited” and “general” partners.