In talking to various investment advisors, I get the sense they think they’ll need to promise 20% returns to get investors’ attention in the next generation of fund marketing. Placement agents “won’t give us” any attention otherwise, says one manager. The rationale is low returns won’t sell since investors will expect big opportunistic gains coming out of the downturn in a rebound to the pre-crash mindset. Maybe more significantly, a big part of the sponsor market, including the investment brokers, hopes to recapture the just recently bygone days of outsized large promotes and giant fees.
But let’s get realistic. Sure some buy low ride the market up transactions will score. And eventually investors could reap ample gains on discounted loan purchases—once lenders start selling them. But real estate is essentially not so much a value add or opportunity play as a core/core plus style investment. The last 10 years were an anomaly enabled by a cheap-debt energized transaction market. If you believe lenders will be constrained for some time to come and interest rates are headed up, the leverage will just not be there to jump start returns. And if you believe a recovery in tenant demand will be slow because of the need to deleverage the economy and absence of growth drivers, then the buy low sell high strategies will be strung out over longer time horizons with less chance to register quick investment pops.
And are investors going to readily buy into sales pitches of opportunistic returns when their existing investments in opportunity style funds have ignominiously cratered? One investment advisor told me that his company wouldn’t be able to support a 20% target if a prospect challenged their pro formas. They won’t pencil out, especially without any leverage.
Real estate managers might be better positioned if they refocus their stories on the asset class’s income-oriented fundamentals, looking to find value in recovery by rebuilding property-income streams through aggressive asset management and leasing strategies.
Hey everyone, it took nearly 75 years to return our asset markets to Roaring Twenties style excess. After the current debacle resolves, the capital spigots won’t blithely re-open if for no other reason than heightened government regulation.
It’s time to tone down performance expectations for these new fund concepts and maybe get back to the idea of under-promising and over delivering. Hung over investors might welcome the more sober approach.
I think one of the issues here is that the closed-end fund model does not compensate the GP or the investor fairly. The promotes paid for liquidating assets in 05, 06 & 07 were far too large based on the effort and skill level necessary to sell in a market gushing with capital. On the contrary, GP staff are working much harder now, having to explore many different alternatives(oftentimes with less people) just to return the capital on the fund...with no expectation of a promoted interest and no reason (once viable alternatives are available) to stick around long-term to harvest the assets that remain.
Posted by: David Gillan | June 29, 2009 at 10:10 AM