By Mark Heil
On October 23 – 24, I attended the PERE Conference in New York City. The conference was hosted by PEI at the Convene Conference Center in the TIAA-CREF building with several hundred attendees including limited partners, fund managers, brokers, lawyers, accountants and fund administrators.
Throughout the two day conference, there were 30+ presenters/panelists who shared their thoughts about the industry. At times, their views were in complete agreement and at other times in contrast to each other. When panelists were asked to identify a hot industry segment, and not surprisingly, panelists identified an industry or geographic segment in which their fund was investing.
Below are some of the repeated themes of the conference:
- Among US investors, the trend is away from CORE markets which are less attractive because of higher pricing compared to a few years ago. Additionally, investors want higher returns and are less risk averse. However, there is significant interest from non-US investors in CORE markets because of the perceived stability of this segment of US real estate market (as compared to other parts of the world).
- Capital raising is improving, but is still difficult. The amount being invested in aggregate is much less than at the peak. Institutional investors are looking to reduce the number of managers in their portfolio.
- While the bulk of investment is expected to remain with the large aggregators (re-ups), operators who are forming funds in niche strategies (e.g., senior housing, student housing, medical offices) will receive the most interest from investors seeking new investments. It is difficult to be a generalist as a new fund and get attention. Also, investors believe that operators’ limited infrastructure (reporting capabilities, lack of controls) is a hurdle they must overcome to gain new investors’ confidence.
- One of the lessons learned from the latest downturn for institutional investors is LP risk – i.e., investing with LPs who do not have the same temperament and outlook.
- Raising capital through broker/dealers and wealth manager platforms are trends. Institutions are becoming more comfortable with investing alongside these platforms, albeit with more scrutiny and discussion around terms related to LP rights.
- Terms continue to be 1.5 – 2% on committed capital and 80/20 split. Breaks for large investors or those in the first close are common. Negotiations around catch-ups are becoming more common.
- LPs continue to focus on fees because they see it as an alignment of interests.
- Demographics are critical for manager selection and strategy feasibility.
- Industry professionals are expecting interest rates to increase slowly as we begin to taper off Quantitative Easing. As a result, some investors suggested avoiding long term debt assets and seeking growth opportunities.
- Achieving liquidity in some emerging markets continues to be a challenge and may create opportunities for secondary funds.
- Selecting managers in emerging markets continues to be a challenge because you need local knowledge. However, track records and information may not exist or be reliable.
- Hotels and hospitality continue to perform well as travel continues to be strong.
- Industry professionals are anticipating that public pension funds will shift to defined contribution plans from defined benefit plans. Hybrid plans may be used to help to smooth the transition. The change will make it more difficult for public pensions to participate in alternative investments.
- On the morning of the second day of the conference, US regulators announced proposed changes to the timing and the calculation of liquidity standards for banks. Several presenters suggested that this could create opportunities for mezzanine funds.
Recently, we have noticed an uptick in the number of inquiries we receive from Real Estate funds. Being connected to an accredited fund administrator (SSAE 16, SOC1) as they capital raise brings comfort to their prospective investors. If you are real estate fund that is capital raising or about to launch a capital raise, feel free to reach out to PEF Services.