As mentioned earlier in our “Capital Surge” post from a few days ago, the “2013 Institutional Real Estate Allocations Monitor” from Cornell University & Hodes Weill identified some interesting trends in the industry.  We’d like to expand upon another noteworthy takeaway from that study today, including a bit more recent info:

“Institutions continue to shift from direct investing to outsourcing to third-party managers.”

It’s been explained that the flow of capital into real estate will be steady in the coming years. A particularly active set of investors will be small to medium-sized institutional investors (i.e., under $50 billion in global AUM).  One of the likeliest vehicles for smaller players to place capital would be through private funds.  In fact, 66% of investors with under $50 billion in AUM will invest via private funds.

In contrast, investors with over $50 billion in AUM (just 47% in funds) tend to prefer JVs, separate accounts, or going direct.  For example, large insurance companies tend to focus on larger, lower-yielding core deals and have bigger staffs who can more readily manage their investments without 3rd parties.

Meanwhile, the private real estate funds will see a rise in interest coming from these several investors looking to increase their under-target allocations.  As such, investors will soon be competing to place their capital into the best funds and, in turn, investment managers will be fielding more investor requests (e.g., Due Diligence Questionnaires).

Case in point: data-provider Preqin has some revealing stats in its Q1 2014 Quarterly Update that shows 54% of private funds that closed in Q1 2014 either met or exceeded their capital targets.  Furthermore, their May Real Estate Update reveals that funds focused on Europe – one of the most attractive investment regions currently – have met or exceeded their capital raising goals in 72% of the funds that closed in Q1 2014.  While this is up from 2013 and 2012 (57% and 46%, respectively), what is most remarkable is that 29% of the European focused funds exceeded their fund raising goals by more than 25%.  An additional tidbit is that in the past year the average time these funds are marketing has dropped to 17 months from 19 months.

A corollary to this is that mediocre managers may take advantage of the large amount of capital eagerly seeking a home. Investors will need to maintain their rigorous investment review processes in order to place capital in those “best in class” funds. As capital surges into real estate it will likely become increasingly competitive for all.  Parties who are able to use technology to be efficient and maximize their resources during this screening and selection process will have a leg up on their peers.

Check back with us soon as we delve into one of the report’s other key conclusions.

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

The flow of capital into real estate has been picking up momentum, driven by a variety of sources.  At the beginning of the year, Cornell’s Baker Program in Real Estate and Hodes Weill released the results of a study they had conducted entitled the “2013 Institutional Real Estate Allocations Monitor.” Its focus is on the trends of allocation of capital into real estate. Combining the conclusions of that report with updated data from the first two quarters of 2014, we highlight some noteworthy trends in capital flow.

Let’s examine a couple of the study’s key conclusions in today’s context:

  1. Institutions are significantly under-invested in real estate, which is resulting in greater capital flows into the sector.
  2. Institutional allocations to real estate are increasing, indicating that the pace of annual investments will likely continue to accelerate well beyond 2014.

It has been well publicized that capital is currently flowing into real estate as the global financial crisis begins to be talked about more and more in the past tense. It is welcome news that capital will continue to flow into the sector for the coming years. This is being driven largely by two components: (1) being short of current target allocations and (2) the aim to raise those allocation targets further.

The report mentions that nearly 40% of institutions are below their portfolio allocation targets for real estate by more than 100 bps. (Industry estimates of institutional AUM are $60 – $80 trillion.) In fact, we can add more fuel to the fire by comparing the distribution of real estate investors’ current target portfolio allocations to the distribution of their actual allocations in Q1 2014. No surprise on the punch line: allocations are still below targets. Moreover, investors are expected to increase their targets by over 50 bps on average.

One sub-set of investors to note is the institutions with less than $50 billion in AUM, whose current under-allocations are 104 bps on average. Investors with $5-$10 billion in AUM (100 bps below target) and those with less than $1 billion (-125 bps) are the most under-allocated within that group. Therefore, while the report indicates capital’s continued and accelerated flow into real estate, it can be expected that there will be various sources of this capital (as opposed to just a few mega-investors topping up their allocations).

Technology now available will aid these investors in their efforts to boost their real estate investments while allowing them to be thoughtful, conduct thorough due diligence, and manage risk.

Check back with us soon as we delve into some of the report’s other conclusions that we found worthy of discussion at this point.

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

A quick note on how successful fund managers differentiate themselves to investors: information.

Investors seek clear, detailed information on fund managers from the very beginning of a prospective relationship. In fact, a lack of clarity in fund information early in the process is a red flag regardless of a manager’s history. Investors know you’re a potential partner when they are able to review details on fund strategy, track record, team and terms easily.

Make it easy by adhering to standardized methods in communicating fund information.

For real estate managers, INREV provides detailed guidance on presenting your track record.

For private equity funds, AltExchange has done a remarkable job of boiling down key metrics.

Use these templates to signal your ability to be a true partner to your investor.

Finally, take a look at the graphic by data provider Preqin: active investors appreciate proactive managers.

fundraising private equity real estate

Investors describe their preference for originating investments to Preqin.

Employing current technology to better communicate and organize yourself during the fundraising process will be appreciated by potential investors. Making a strong impression matters, and technology can make that simple to do.

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

 

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.

By now it is not much of a surprise to hear how the focus from international investors has returned to European real estate.  What is somewhat surprising is the pace and magnitude at which this shift has occurred.  A glance at the headlines these days typically illustrates a refreshing return of liquidity to the European landscape.

In fact, over the last few years, many equity players were hoping at the outset of each year that those next twelve months would become “the year.”  That is, “the year” where debt was finally sold or re-balanced on underwater assets, enabling trades to occur.

Thus, by the time asset and portfolio trades began to happen in earnest in the second-half of 2013, the latent demand from equity buyers had been building for years.  Now, built-up demand finally evinces itself as a great wave of activity in early 2014.

Last Friday, Property EU produced an interesting editorial about “agnostic investors” being the primary force in the return to Europe.  Of course, agnostic does not mean “indifferent.”  Investors are looking for the best risk-adjusted returns in real estate and, as CBRE Capital Advisors notes, investors have four quadrants to choose from: public vs. private and equity vs. debt.

The massive amounts being raised for private debt funds give some indication of where investors are expecting to find those returns.  The existence of fewer traditional lenders (writing smaller tickets) has also enriched the opportunity for shrewd debt investors.

Institutional investors still need to find exceptional partners for their capital.  Investment managers still want to diversify and expand their investor base.  Both sides need access to a broader base of suitable partners.  Both sides need to close their partnerships quickly to take advantage of current market opportunities.

As we proceed into this fast-moving but propitious environment, managers and investors alike will benefit from deploying quality resources to craft the best partnerships.

Technology is a great accelerator. Sharp investors will use technology to their advantage in keeping pace with the current burst of excitement for European real estate.  Clever investors will use data to stay ahead of the market.

Winners in this terrain (among both investors and managers) will be organized and data-rich in identifying the best partners.  For all sides, effective execution of partnerships will hinge on proper communication.

How will you make sure the best managers are on your radar?

How will a judicious investor find you?

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

 

Software and technology offerings to the private equity industry are evolving rapidly.  A disparate set of choices exist for you, the intrepid investor trying to maximize time spent on accretive core activities (such as investing) while minimizing time spent on predicting software failure.  Often, you never know whether a solution will work for your platform until you try it, and by then, it’s too late – your team has spent hours in training learning to navigate complex input and output mechanisms. Time has already been spent accommodating finicky technical capabilities.  Some members of your team may opt out entirely, creating a rift in the flow of information.

Our ongoing chats with the global institutional investment community – investors, operators, and managers alike – make it clear: everyone needs better technology to advance mission-critical functions.  From Tokyo to London to San Francisco, and cities in-between, the institutional private equity industry is ready for good software.

Pick ten of your peers and ask them what kind of technology they use to manage capital partnerships.

Chances are, one or two of those ten will have adopted software to facilitate their partnerships with investors, operating partners and/or managers.  Typically, this is a “CRM” system, data room and/or portfolio management software.  (If you travel exclusively with those who do a relatively good job of keeping ahead of the pack, closer to six in ten of your peers may have adopted software of some sort).

You may find it interesting to inquire exactly how many of those folks are actually happy with their software choice.  You may want to ask whether (and in which use cases) the software adequately performs for them.  It is worth the investigation if you’re considering purchasing a system yourself.

We won’t deny that we’ve heard some horror stories.  And yet, to avoid technology at this hour is to play fast and loose in a highly competitive, increasingly sophisticated business environment.  Rodney June of the $21.8 billion Los Angeles City Employees’ Retirement System pointed out to us that technology decisions are an important component in evaluating a manager.  Tom Lopez of the $16.7 billion Los Angeles Fire and Police Pension Plan advises: don’t let technology get in the way of communicating quickly and effectively with your potential investment partner.

The fact remains that software for the PE industry is relatively new, highly fragmented, and broadly untested. However, smart investors will pick a horse and start moving up the learning curve sooner rather than later.

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

People, Process, and Philosophy are at the heart of many investors’ decisions to go with an investment advisor. Investors spend a lot of time getting to know the quality and fit of an advisor in relationship to their portfolio strategy and goals. Quality and fit is often exemplified in the investment advisor’s people (who is the team?), process (what is their investment process – from acquisition to disposition?) and philosophy (is there a cogent view that drives the investment process?).

How do you communicate your “P”s accurately and effectively to an investor that you want to work with?

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

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