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Internal Rate of Return

Last week Norges Bank Investment Management (NBIM) – the entity that controls Norway’s $890 billion wealth fund – announced that it would be ramping up its investment into global real estate.

The fund has been permitted to invest into real estate since 2011 and at the end of 2013 held 1% of its portfolio in real estate. However, because its target allocation is actually 5%, it will seek to invest 1% of its fund in each of the next three years.  Yes, $27 billion looking for real estate investments during the next three years.

There are a few interesting components to their strategy.  First, NBIM staff dedicated to real estate will increase to about 200 people – a lot more eyes, ears, and hands to source and manage their real estate investments.  Geographically, most of NBIM’s recent investment has focused on the US and Europe and they will now look at other major markets in Asia and “global cities outside Europe.”  This could include a more direct stake in emerging markets.  Finally, NBIM will be doing fewer JVs and looking to manage fully-owned properties, plus an increase in active involvement with development.  Part of this strategy will also be seeking public-to-private transactions.

Not only does this story underscore some of the trends identified in our earlier posts in this space (e.g., Capital Surge), but it is also interesting to think about its impact on the marketplace.  NBIM’s activities could be seen as a significant competitive presence to other buyers and sellers of real estate investments. Plus, the weight of capital in the more attractive markets may affect pricing and risk-adjusted returns.

NBIM, as stated before, plans to increase the number of staff dedicated to real estate to approximately 200 professionals.  Regardless of the number of staff dedicated to an investment strategy, the ability to manage information between team members and coordinate intelligence-gathering is critical.  While investors continue to seek ways to automate paper-based processes and access broader data, they are also looking for ways to quickly and efficiently distribute updates within their own organizations, no matter how small or large.   Accordingly, transparency and communication is the hallmark of the most adept fund managers. Today, cleverly designed technology infrastructure can go a long way in supporting highly effective investors and investment managers.

This is the Sterlinks blog. Access Sterlinks tools to maximize your internal resources by visiting http://www.sterlinks.net.

Previously in this space (“Capital Surge” and “Capital Surge: Part 2“) we’ve discussed a couple of interesting conclusions from the Cornell University’s Baker Program in Real Estate & Hodes Weill study the “2013 Institutional Real Estate Allocations Monitor” in relation to more recent news.

A third key take-away from the survey that caught our attention is the shift towards an increasingly global, cross-border investment strategy for many institutional investors. One of the more revealing stats is that Asia-Pacific investors are currently under-invested by 130 bps and also plan to raise their targets by 140-150 bps (i.e., almost 300 bps of their portfolio’s total size will be newly invested in real estate in the near-term).  So, don’t be surprised as this set of investors ramps up their investment quite rapidly.

In addition, despite being not as under-allocated, 38% of North American investors (compared to 24% of investors from Asia-Pacific) revealed their intent to increase their investment into private real estate during 2014, according to data-provider Preqin.  So whether capital placement is driven by need or want the conclusion remains that capital placement certainly will be on the rise, and not only in investors’ back yards.  For instance, of the North American investors seeking investments in the next 12 months, 38% are targeting Europe, which is up from 17% a half-year ago. 60% of Asia-Pacific investors are aiming at Europe, versus 39% a half-year ago.  Those are impressive jumps.

Furthermore, CBRE released a report earlier this week regarding Middle East capital flows into real estate (“In and Out – Middle East”). This research report anticipates a substantial amount of capital flowing from that region over the next decade.  CBRE estimates $180 billion will be invested by Sovereign Wealth Funds (SWFs) and private investors from the Middle East in Europe (80%), the Americas (10%) and Asia-Pacific (10%). The domestic markets don’t have nearly enough volume to absorb the SWF’s investment targets, hence the capital predominantly goes internationally. By comparing this amount to the $45 billion invested between 2007 and 2013 we can begin to understand how significant an increase it is.

Therefore, in order for these investors who are escalating their investment volumes internationally to invest further and further from their front door, it requires technology to bridge that geographic gap.  Evolving technology will allow institutional investors to use their resources effectively from a central base – for both identifying & sourcing investment opportunities as well as organizing multiple due diligence processes efficiently.   Moreover, investment managers can benefit from the same technology by being able to extend their marketing reach to capital partners further afield.

This is the Sterlinks blog. Access Sterlinks tools to maximize your internal resources by visiting http://www.sterlinks.net.

For Immediate Release

For Immediate Release

CalSTRS Adopts Sterlinks Due Diligence Technology and Joins Sterling Analytics Advisory Board

Sterlinks software platform offers California pension plan investment team broader market data, enhanced transparency with investment managers, and longer-term visibility on potential investment partners

SAN FRANCISCO, June 10, 2014 — The California State Teachers’ Retirement System (CalSTRS) this week adopted Sterlinks, a cloud-based utility that automates due diligence and analytics on investment opportunities. Sterlinks is the flagship technology product of Sterling Analytics (http://www.sterlinganalytics.net).

In addition to adopting the Sterlinks platform to expand and improve CalSTRS due diligence capabilities on global real estate investment opportunities, investment officers Josh Kawaii-Bogue and Kevin Bassi will represent CalSTRS on Sterling Analytics’ Advisory Board.

CalSTRS is interested in leveraging technology and data to improve its investment process.

CalSTRS expects to use the Sterlinks platform to augment internal resources and reduce costs related to travel, document retrieval and administrative tasks.

“We believe Sterlinks gives the CalSTRS investment team access to a broader set of data and analytics related to investment opportunities, fund managers and operators.  This will support our investment staff in navigating complex global real estate markets where access to the best local expertise and market data can be an advantage,” said CalSTRS Director of Real Estate, Mike DiRe.

“We hope to use the data and analytics gained from the Sterlinks platform to supplement our research on major investment decisions related to our $22.4 billion real estate investment portfolio,” said Investment Officer Josh Kawaii-Bogue.

“CalSTRS leadership is charged with steering the second-largest pension fund in the U.S. We look forward to supporting them with technology to achieve their investment objectives effectively,” said Meera Balakumar, Director of Sterling Analytics.

The Sterlinks platform will offer the CalSTRS real estate team the following principal tools:

  • Partner Due Diligence hub: to centralize and automate due diligence on global investment managers and operators;
  • Sterlinks Notebook Client Relationship Management (CRM): to track and manage new and existing investment relationships; and
  • Network Builder: for desktop and mobile-enabled networking with global real estate investors, managers and operators.

About Sterling Analytics

Sterling Analytics provides institutional investors with technology tools designed to help them identify investment partners, build intelligent partner relationships, and manage partner due diligence. Sterling Analytics’ flagship next-generation due diligence software, Sterlinks, is tailored to the needs of the institutional investment process. The Sterlinks platform integrates client relationship management (“CRM”), networking, due diligence and analytics to strengthen and build capital partnerships.

About CalSTRS

The California State Teachers’ Retirement System, with a portfolio valued at $183.8 billion as of April 30, 2014, is the largest educator-only pension fund in the world. CalSTRS administers a hybrid retirement system, consisting of traditional defined benefit, cash balance and voluntary defined contribution plans. CalSTRS also provides disability and survivor benefits. CalSTRS serves California’s 868,000 public school educators and their families from the state’s 1,600 school districts, county offices of education and community college districts.

Contact:
Sterling Analytics Press Team
+1(415) 868-5391
info@sterlinganalytics.net
www.sterlinks.net
www.twitter.com/sterlinks

Last week data provider Preqin reported remarkable findings in the comparison of small vs. large real estate funds.  It turns out that smaller funds have delivered better returns (5.9% on  funds with under $500 million of assets under management, or “AUM”, between 2005-2011) than larger funds (2.3% on funds with over $1 billion AUM).  Surprised?  Well, here’s another nugget: fund managers with less experience have typically performed better than fund managers with several vintages of funds under their belts.

First a couple of caveats, the “less experience” label is for the organization itself, not necessarily the individuals behind the organizations. Presumably, new fund managers are often founded by successful industry veterans coming from larger organizations.  They may bring their savvy and some contacts, but the brand must be built from scratch.  Second, although the “big brand” funds appear to have lower returns than smaller funds, the standard deviation of the returns is lower for those big funds (i.e., less volatile). So, while they may have lower returns, the big funds tend to be more steady.

The question we would like to focus on is how technology in particular can be helpful to smaller funds that may not have dedicated resources for attracting institutional capital.

An institutional investor searching for the best returns may not be aware of or may not have access to these smaller real estate funds who stand to deliver the highest returns.  Likewise, a real estate investment manager raising a smaller fund for a niche or highly localized strategy may not be able to market itself widely to a global set of potential investors.  The same could be said for a new fund manager launching its inaugural fund.

As we’ve stated in this space before, emerging technologies offer a solution for bridging these gaps. Preqin notes: “institutional investors that have the skill and resources to seek out attractive emerging managers have the potential to be rewarded for doing so.”  Indeed, and similar to fund managers, investors who are able to maximize their internal due diligence resources by leveraging technology will be the most productive in capturing attractive opportunities.

This is the Sterlinks blog. Access Sterlinks tools for your capital formation process by visiting http://www.sterlinks.net.

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