Robust economic growth in emerging markets and the fallout from the credit crunch have generated a surge in the number of small-cap opportunistic private real estate funds seeking investme
Robust economic growth in emerging markets and the fallout from the credit crunch have generated a surge in the number of small-cap opportunistic private real estate funds seeking investment capital around the world, according to research by New York-based fund of funds manager Clerestory Capital Partners.
Rising competition for institutional capital is also increasing pressure on managers to accept ‘special terms’ from investors, Clerestory argues in a position paper accompanying the research. This issue needs to be more widely debated, the paper says, as it could weaken real estate fund structures and endanger the investor/manager trust relationship that is the lynchpin of the market.
‘There continues to be an investor focus on growth in emerging markets, although in the US and European markets there are a number of new funds, or funds in formation, targeting distressed situations,’ says Clerestory principal and co-founder Tommy Brown.
In the first quarter of 2008, Clerestory identified 128 small-cap (raising less than USD1bn in equity) opportunistic real estate funds in the global market seeking to raise a total of USD54bn, – a sharp increase from the third quarter of 2007, when 107 such funds were looking to raise USD45bn.
Small-cap opportunistic real estate funds seeking deals in the Americas (51) and Asia (47) in the first quarter of this year were more numerous than in Europe, but European vehicles showed the largest proportional rise in the six months between the two surveys, from 14 funds in 2007 to 24.
In terms of the volume of capital being targeted, Asia was the leading region for investment at USD22bn in the first quarter, compared with USD17bn six months earlier, followed by the Americas with USD19bn, up from USD17bn in the third-quarter of 2007, and Europe, up from USD7bn to USD11bn.
‘The results of our survey clearly show that the proliferation of funds pursuing higher-return investment strategies continues,’ says Clerestory principal and co-founder Joanne Douvas (photo). ‘At the same time, the velocity of capital raising has decreased significantly – suggesting that competition among funds is increasing, and with it the temptation to accept special terms from investors to draw in capital.
‘This convinces us that the principle of equality of terms among investors in funds is even more crucial now, as we believe it leads to a more efficient management process, a better product, a higher-quality investor base and, ultimately, better performance.’
The paper, entitled Fair Trade: The Wisdom of Setting Equal Terms, outlines the fund-of-funds manager’s concerns on this issue and advocates a more equitable approach: identical terms for all investors regardless of size, with the exception of fee breaks for certain commitment amounts, fair compensation for performance, and equitable and even-handed governance that promotes transparency and good communication while holding the manager to a high fiduciary standard.
The Clerestory principals say they appreciate the practical reasons why larger investors and aggregators of capital seek favoured terms, but still believe the benefits of fair terms outweigh the need for such rewards.
Clerestory Capital Partners is a real estate investment management company specialising in sponsoring performance-focused funds of real estate funds. The firm says it invests its limited partners’ capital by identifying funds in a superior position to capitalise on changes across the industry. Its investment focus is on the opportunity segment of the risk-reward spectrum, characterised by high returns, moderate to high leverage and short-term hold periods for underlying investments.
