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.

Raising a fund for small- to mid-size investment managers requires a lot of effort and resources across the organization. The right technology resources can be an instant boon to investment managers raising capital. Tools for managing the due diligence process efficiently while accessing a broader pool of capital enables top-quality investment managers to be responsive, transparent, and quick. These effects will be well-regarded by institutional investors who have rigorous standards in placing capital.

Last week Blackstone announced the closing of their record-setting European real estate fund at €5.1 billion. In fact, investors have shown a sizable appetite for large global funds who are focusing on real estate opportunities, especially in Europe. For instance, the following well-known global giants closed international real estate funds in 2013 Lone Star ($12 bn in 2 funds), Blackstone ($3.5 bn for debt), Brookfield ($4.4 bn), Starwood ($4.2 bn), and Cerberus ($1.4 bn).

Moreover, Perella Weinberg (€1.3 bn) and Orion (€1.3 bn) raised European-specific opportunistic funds in 2013. Plus, Tristan recently left hundreds of millions of Euros unfulfilled from investors when they hit their hard cap of €950 million in capital commitments for their EPISO 3 Fund last month. However, these examples actually reveal some subtle issues with the capital formation process itself.

First, not every European investment manager is able to capitalize on this halo effect of a “hot Europe” and absorb the institutional capital seeking a home. In fact, funds operating several degrees of magnitude lower than Blackstone, Lonestar and even Tristan are still seeing long lead-times for raising their funds. Preqin details that funds that closed in 2013 took an average of 19 months to close (and we would guess that the bigger ones listed above took far less than 19 months and therefore skew the average lower than, say, what the median might be). On top of that, over 40% of the funds currently in the market have been raising (or trying to raise) capital for 18 months.

Yes, the big funds are big for a reason – their scale has been achieved through capitalizing on consistent quality performance. Another stat for you: 7% of 2013 capital raised was done by 1st time funds while 44% was raised by managers with a 9+ fund track record. So on the surface, the big funds seem like safe bets. But how much of that “safe” bet is due to “brand?” There are many funds in the 250 – 400 million equity range that have delivered just as strong (if not stronger, in some cases) returns for their investors. So then why are the big names finding demand so buoyant, while the more niche players take much longer to close capital than ever before?

The transparency required and the due diligence conducted during the capital formation process is now getting harder to manage. For example, if any smaller European fund manager were able to allocate fewer resources towards capital raising and conduct due diligence with more organization and more efficient communication, then they would certainly be able to react to the recently increased scrutiny from institutional investors. While investors are eager to take advantage of “recovery” in the real estate markets and allocating sizable investments to take advantage of that, it is more likely that they allocate this capital in larger chunks with the big name funds instead of spreading it around to several smaller fund managers.

This is the Sterlinks blog. Access Sterlinks tools to take your relationships with investors and investment advisors to another level. Visit http://www.sterlinks.net.

Managers are instinctively inclined to raise as much money as they possibly can. When the clock starts ticking, deployment can become an issue.

At the PEI annual CFO & COOs Forum in New York last month, there was much discussion of how to expedite fundraising while avoiding the most common stumbling blocks. According to PEI’s Research & Analytics team, 1,624 funds are currently in the market, with a combined target of $616.7 billion (more than the total raised in 2008). In 2013, 599 firms closed funds with total commitments of $385.6 billion.

Investors have an insurmountable stack of PPMs to sift through this year. As always, fees, carry, clawbacks, offsets, LP advisory boards, etc. will be carefully considered. Fund size has also taken the spotlight this year. Fund size has a direct impact on every strategic and tactical aspect of a firm’s business model. Investors want to know exactly how the fund size is targeted, and exactly what consequences that has for a firm’s strategy and resource base. Managers must be wary of going up to a number that does have a significant operational impact.

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

IREI and Jones Lang LaSalle report that the U.K. and the U.S. attracted the majority of the $7.6 billion of Chinese investment into foreign (non-Chinese) property in 2013, with the office sector accounting for 85% of investments made. Singaporean property got $1 billion of Chinese investment in 2013, despite having none just one year prior in 2012. Total global capital outlay outside of China by Chinese property investors was double that of 2012. The full story can be found in this week’s IREN.

Meanwhile, PERE reported that 26.9% of North American investors and 53.8% of Asian investors are eager to increase allocations to real estate private equity. More than half of Europe’s investors still prefer core real estate to value-added or opportunistic, and there is more enthusiasm for value-added and opportunistic strategies in Asia. INREV found that 55.6% of European investors are most worried about narrow vehicle choice.

PERE notes that since the largest institutional investors are increasingly focusing on joint ventures and club deals, fund managers of higher yielding strategies should focus on a larger array of smaller investors.

Meanwhile, a panel at this week’s PEI Media conference noted that investors are broadly concerned about funds that are too big in size. More on that to come.

And one more thing, Geoff Dohrmann shared this video via twitter of Sam Zell on infrastructure: http://bit.ly/1eNiMBE

This is the Sterlinks blog. Access Sterlinks tools to take your relationships with investors and investment advisors to another level. Visit http://www.sterlinks.net.

The fundraising market remains crowded and managers need to be more aware than ever of institutional investors’ preferences (investment criteria, asset class appetite, reporting needs) in order to stand out. Being highly visible to potential partners is also key.

Per Preqin, $76 billion of aggregate global capital commitments were made into private real estate funds in 2013, surpassing the $67 billion raised in 2012. The average fund size increased from $332 million for funds closed in 2012 to $511 million for funds closed in 2013. However, the number of funds closed fell from 224 in 2012 to 162 in 2013.

Managers who are able to quickly glean information about each potential investor they may target can swiftly identify suitable investors and avoid wasting time pursuing ill-fitting partnerships. Likewise, managers who are able to nimbly fulfill the information requirements of investors have a clear advantage in winning the trust and attention of potential capital partners.

This is the Sterlinks blog. Access Sterlinks tools to take your relationships with investors and investment advisors to another level. Visit http://www.sterlinks.net

Identifying the right capital partners takes time and resources. Current trends exacerbate the expense of seeking partners in the institutional investor universe.  Allocating investment team resources to investor communication and marketing tasks can place a cumbersome burden on managers. 

Marketing is a critical function, and yet managers often lack sufficient dedicated marketing resources. Even when a marketing team is in place, they are often stretched thin with processing and administration (think excel-based tracking of investor relationships and manual inputs). As a result, investment teams otherwise meant to focus on transaction pipeline, investment execution and value-add asset management are diverted to marketing and report generation.

Marketing professionals should be focusing on building relationships and interacting with investors, not excessive paperwork, report generation or desktop publishing.

This is the Sterlinks blog. Access Sterlinks tools to take your relationships with investors and investment advisors to another level. Visit http://www.sterlinks.net

Investment managers recognize that they are contending for capital in a highly competitive, crowded environment.  The capital sought by managers for closed-end fund strategies alone is growing on a quarterly basis.  However, for any given capital raise the average number of months a manager now spends on the road has doubled since 2007 – to approximately 18 months in 2013. 

Savvy investment managers realize that their success hinges on striking a balance between the business of investing and the business of capital raising.  Managers must deftly navigate a detailed investor due diligence process and convey high standards of transparency, yet at the same time commit to delivering a strong investment track record.

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